Morningstar’s Equity Strategist Greggory Warren covers Berkshire Hathaway.
We continue to believe that Berkshire Hathaway, owing to its diversification and lower overall risk profile, offers one of the better risk-adjusted return profiles in the financial-services sector and remains a generally solid candidate for downside protection during market selloffs.
We remain impressed by Berkshire’s ability in most years to generate high-single- to double-digit growth in book value per share, comfortably above our estimate of its cost of capital.
We also believe that it will take some time before the company finally succumbs to the impediments created by the sheer size and scale of its operations and that the ultimate departure of Warren Buffett and Charles Munger will have less of an impact on future operating results than many investors believe.
We view Berkshire’s decentralized business model, broad business diversification, high cash-generation capabilities, and unmatched balance sheet strength as true differentiators for the company.
Berkshire Hathaway's Economic Moat Rating
We believe that Berkshire’s economic moat is more than just a sum of its parts, although the parts that make up the whole are fairly moaty in their own regard. The insurance operations—Geico, Berkshire Hathaway Reinsurance Group, and Berkshire Hathaway Primary Group—remain important contributors to the overall business.
Not only do they account for about 25% of Berkshire’s pretax earnings (and 46% of our current valuation of the company), but they are overcapitalized and generate low-cost float.
These temporary cash holdings, which arise from premiums being collected in advance of future claims, have allowed Berkshire to generate additional returns as the company invests these funds in assets that are commensurate with the duration of the business being underwritten.
And they have tended to come at little to no cost to Berkshire, given the company’s proclivity for generating underwriting gains over the past several decades.
Risk and Uncertainty
Our Morningstar Uncertainty Rating for Berkshire is Low. We don’t consider any environmental, social, or governance issues at the company to be material enough at this point to affect our uncertainty rating, primarily because of the company’s lower exposure to some of the main ESG risks inherent to the industries where it competes.
However, Berkshire has generally scored lower on governance issues because of the makeup of its board and board committees, the unequal voting structure of its shares, and the lack of engagement and opaqueness on governance issues historically.
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