Wondering whether Berkshire Hathaway is fairly priced right now? Let’s break down what the stock’s current value really means for investors like you.
Berkshire’s shares have pulled back slightly, down 2.5% over the past week and 4.6% over the last month. The stock still holds a healthy 7.5% gain over the last year and an impressive 114.8% return over five years.
Recent headlines center around Berkshire’s growing cash pile and renewed interest in strategic acquisitions. These developments highlight Warren Buffett’s cautious optimism in a volatile market. Investors are watching closely to see if these moves signal new avenues for growth or hedging against economic uncertainties.
According to our checks, Berkshire scores 4 out of 6 for undervaluation based on key metrics. How does this stack up against other methods investors use, and could there be a smarter way? Stick around as we walk through the main approaches and reveal an even more insightful valuation angle later on.
The Excess Returns valuation model highlights how much value Berkshire Hathaway generates above the required cost of its equity capital. In this approach, we focus on the business’s ability to earn attractive returns on invested capital while growing its base of assets over time. This method is especially relevant for a company like Berkshire Hathaway, which reinvests most of its earnings instead of paying dividends.
Berkshire’s current Book Value stands at $464,307.83 per share, with an average Return on Equity of 13.00% based on the median from the past five years. The company’s Stable Earnings Per Share are estimated at $66,967.95, while the Cost of Equity amounts to $39,271.20 per share. This leaves an annual Excess Return of $27,696.74 per share, an indication that Berkshire’s investments are continuing to generate substantial value for shareholders. Looking forward, analysts project Berkshire’s Stable Book Value to reach $514,986.06 per share (a figure derived from weighted future estimates by two analysts), supporting the company’s ability to maintain strong returns in the years ahead.
This model estimates Berkshire Hathaway’s intrinsic value at roughly $751 per share. Comparing this to the recent share price, the Excess Returns model suggests the stock is about 36.7% undervalued. In other words, investors may be getting more underlying value than the current price reflects.
The Price-to-Earnings (PE) ratio is a widely preferred tool for valuing consistently profitable companies like Berkshire Hathaway. It measures how much investors are willing to pay per dollar of earnings, which makes it a practical benchmark for mature businesses with stable profit streams.
A company’s expected growth and risk profile are critical in determining what constitutes a “fair” PE ratio. Firms with higher growth prospects or lower risk typically command higher PE multiples, while more volatile or slower-growth businesses tend toward lower ratios.
Berkshire Hathaway currently trades at a PE ratio of 16.3x. When compared with the Diversified Financial industry average of 14.8x, Berkshire’s valuation is moderately above the norm. However, the industry’s peer group averages an even loftier 26.8x, placing Berkshire at a discount relative to similar large caps in the sector.
The “Fair Ratio,” as calculated by Simply Wall St, is 17.3x for Berkshire. This metric is tailored specifically for the company, factoring in earnings growth, risk, profit margins, industry characteristics, and market capitalization. Unlike basic peer and industry comparisons, the Fair Ratio delivers a sharper estimate of what investors should reasonably expect given Berkshire’s specific fundamentals.
Comparing Berkshire’s actual PE of 16.3x with the Fair Ratio of 17.3x, the stock’s valuation is close to where it should be, with only a slight discount. For investors, this suggests Berkshire Hathaway’s current price is justified by its performance and prospects.
Earlier, we mentioned that there is an even better way to understand valuation, so let’s introduce you to Narratives. A Narrative is a simple but powerful tool that lets you capture your unique perspective on a company by connecting its story to concrete financial forecasts, such as future revenue, earnings, and profit margins. These forecasts ultimately inform what you believe is a fair value.
Narratives link your viewpoint about Berkshire Hathaway’s growth and prospects directly to detailed forecasts and a fair value estimate, making your investment decisions more intentional and personalized. Best of all, Narratives are available within the Simply Wall St Community page, an easy-to-access feature used by millions of investors worldwide.
This approach lets you quickly compare your Narrative’s calculated fair value to the current share price. This can help you decide if now is the right moment to buy or sell. Narratives are dynamic and automatically update in real time as new information, such as news or earnings, is released.
For example, on Berkshire Hathaway, some investors are optimistic and set their Narrative’s fair value as high as $818 per share, while others are more cautious with valuations near $650. Narratives empower you to see and understand these differing perspectives in one place, so you can invest with greater confidence.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Companies discussed in this article include BRK-B.
