How Much Momentum Does Berkshire Hathaway Inc. (BRK.B) Have Left? Buffett's holding company Berkshire Hathaway's (BRK.B) stock has gained more than 10% over the past three months. The surge is due to the company's solid first-quarter earnings, driven by a...

Buffett's holding company Berkshire Hathaway's (BRK.B) stock has gained more than 10% over the past three months. The surge is due to the company's solid first-quarter earnings, driven by a rebound in its insurance business. So, let's determine how much momentum is left in this stock. Read on to know more….

Well-known investor Warren Buffett's diversified holding company Berkshire Hathaway Inc. (BRK.B) reported impressive results for the first quarter of 2023. While BRK.B has a solid financial position, its subsidiary, PacifiCorp, faces legal issues. Given its highly elevated valuation and uncertain economic conditions, it could be wise to wait for a better entry point in this stock.

BRK.B is a massive holding company run by renowned investor Warren Buffett since the mid-1960s. The company provides property and casualty insurance and reinsurance, utilities and energy, finance, freight rail transportation, manufacturing, retailing, and services.

Warren Buffett's BRK.B operates through the following segments: GEICO; Berkshire Hathaway Reinsurance Group; Berkshire Hathaway Primary Group; Burlington Northern Santa Fe, LLC (BNSF); McLane Company; Manufacturing; and Service and Retailing.

For the first quarter of fiscal 2023, revenue and earnings for BRK.B jumped significantly, driven by a rebound in the conglomerate's insurance business. The company's insurance underwriting business saw a sharp increase, from earnings of $167 million in the first quarter of 2022 to $911 million now. Also, insurance investment income grew 68% year-over-year to $1.17 billion.

In addition, GEICO witnessed a major turnaround during the quarter, returning to an underwriting profit of $703 million. Last year, the auto insurer incurred a $1.90 billion pretax underwriting loss as it lost market share to rival Progressive. BRK.B's cash hoard also climbed to $130.62 billion from $128 billion in the prior year's quarter.

Furthermore, the holding company repurchased $4.40 billion worth of stock, the most since the first quarter of 2021, an increase from $2.80 billion at the end of last year.

While the fiscal 2023 first-quarter results indicate the company's strong financial position, the verdict in the Oregon wildfires case came against its subsidiary, PacifiCorp, an electric utility with service territory throughout Oregon, northern California, and southeastern Washington.

On June 14, an Oregon jury told PacifiCorp to pay punitive damages for four of the wildfires that devastated the state in 2020. Berkshire-owned company, PacifiCorp, owes more than $70 million in compensatory damages to 17 property owners for its negligence.

Shares of BRK.B have gained 10.1% over the past six months and 22% over the past year to close the last trading session at $334.15.

Here's what could influence BRK.B's performance in the upcoming months:

Solid Financials

For the first quarter that ended March 31, 2023, BRK.B's total revenues increased 20.5% year-over-year to $85.39 billion. The company's revenues from Insurance and Other segment rose 7.8% from the year-ago value to $63.46 billion. Also, its earnings before income taxes came in at $44.06 billion, an increase of 543.3% year-over-year.

Furthermore, net earnings attributable to BRK.B shareholders increased 536.3% year-over-year to $35.50 billion. Its cash inflow from operating activities was $8.69 billion, up 27.4% year-over-year.

Mixed Historical Growth

Over the past three years, BRK.B's revenue grew at a 7.5% CAGR, while its total assets increased at a CAGR of 9.5%. However, the company's EBIT and net income declined at CAGRs of 13.6% and 10.8%, respectively. Also, its EPS decreased at a 7.6% CAGR over the same time frame.

Mixed Analyst Estimates

Analysts expect BRK.B's revenue for the second quarter (ending June 2023) to increase 8% year-over-year to $82.27 billion. However, the consensus earnings per share estimate of $2.11 for the current quarter indicates a decline of 2.1% year-over-year.

In addition, analysts expect BRK.B's revenue for the fiscal year (ending December 2023) to grow 14.7% and 16% year-over-year to $346.42 billion and $16.22, respectively. Also, the company's revenue and EPS for fiscal year 2024 are expected to decrease by 0.9% and increase 13% from the prior year to $343.45 billion and $18.33, respectively.

Stretched Valuation

In terms of trailing-12-month non-GAAP P/E, BRK.B is currently trading at 23.07x, 175.6% higher than the industry average of 8.37x. The stock's trailing-12-month EV/EBITDA of 35.33x is 185% higher than the industry average of 12.40x. Likewise, its trailing-12-month EV/EBIT multiple of 76.98 is significantly higher than the industry average of 13.14.

Additionally, BRK.B's trailing-12-month Price/Cash Flow of 18.80x is 213% higher than the industry average of 6.01x.

Mixed Profitability

BRK.B's trailing-12-month CAPEX/ Sales of 5.08% is 165.2% higher than the industry average of 1.92%. Also, the stock's asset turnover ratio of 0.32x is 58.5% higher than the industry average of 0.20x.

However, BRK.B's trailing-12-month gross profit margin of 3.01% is 94.9% lower than the 58.72% industry average. The stock's trailing-12-month EBITDA margin and net income margin of 6.57% and 2.24% compare to the industry averages of 20.63% and 25.84%, respectively.

POWR Ratings Reflect Uncertainty

BRK.B has an overall C rating, equating to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. BRK.B has a B grade for Growth, in sync with its solid financial performance. Also, it has a B grade for Stability. The stock's 24-month beta of 0.78 justifies its Stability grade.

In addition, the stock has a C grade for Quality, consistent with its mixed profitability. On the other hand, BRK.B has a D grade for Value, consistent with its significantly higher valuation relative to its industry peers.

BRK.B is ranked #36 out of 57 stocks in the Insurance - Property & Casualty industry.

Beyond what I have stated above, we have also given BRK.B grades for Sentiment and Momentum. Get all BRK.B's POWR Ratings here.

Bottom Line

Renowned value investor Warren Buffett's BRK.B posted a jump in earnings in the first quarter of 2023. The solid quarterly financial performance is partly attributed to a rebound in Berkshire's insurance business. While the company's outstanding financial results reassure investors, its subsidiary, PacifiCorp, grapples with legal challenges.

Given BRK.B's considerably high valuation and the uncertain macroeconomic environment, it seems prudent for investors to wait for a better entry point in this stock.

Stocks to Consider Instead of Berkshire Hathaway Inc. (BRK.B)

Given its uncertain short-term prospects, the odds of BRK.B outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) or B-rated (Buy) stocks from the Insurance - Property & Casualty industry instead:

Fairfax Financial Holdings Ltd. (FRFHF)

Tokio Marine Holdings Inc. (TKOMY)

Heritage Insurance Holdings, Inc. (HRTG)

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BRK.B shares rose $1.34 (+0.40%) in premarket trading Thursday. Year-to-date, BRK.B has gained 8.61%, versus a 15.21% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet's keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet's looks to help retail investors understand the underlying factors before making investment decisions.

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