Fundamental Analysis of Berkshire Hathaway: Misconception

Key points of Fundamental Analysis of Berkshire Hathaway(BRK):

  1. Officially, Berkshire Hathaway is transportation, energy, and an insurance company.
  2. Due to its area coverage and economies of scale, Berkshire’s transportation business enjoys a cost advantage over its competitors.
  3. Berkshire’s insurance enjoys a switching cost advantage.
  4. Berkshire’s business is durable, and reliable in the long run, but it is slow. What makes Berkshire’s price rise is probably due to its stock investment and buyback.

A Hidden Gem of Berkshire Hathaway (That Everyone Knows):
Fundamental analysis of Berkshire Hathaway shows us that it is not merely a conglomerate.

Officially, Berkshire Hathaway is a parent company that has many companies from many industries as subsidiaries. But what is special about this company is not that conglomeration. But how the money generated by those subsidiaries is invested somewhere else (stock market)(1) and becomes massive.

Berkshire’s core business (transportation, energy, and insurance) only deliver a total of around $31 billion in profit in 2021(2). This number is easily capped by Berkshire’s investment worth 350 billion in 2021(3).

  1. Warren Buffett and the gang invest in the stock market through Berkshire Hathaway as a vehicle. The Ohama-based company invests massively in Apple. Besides the smartphone maker, Berkshire also invests in Amazon, Visa, MasterCard, Bank of America, American Express, etc.
  2. Though, that impressive number is easily capped by Berkshire “another” business. The railroad and industry segments deliver $10 billion in operating profit (See figure 2). While the Buffett darling – the insurance – delivers $21 billion (see figure 3).
  3. According to its annual report (see figure 1), Berkshire writes that investment as an equity investment. In 2017, it was worth around 164 billion. In 2021, it was worth 350 billion. Almost 100% appreciation in the 5 years period.

How It Works (Building Portfolio)
Fundamental analysis of Berkshire Hathaway shows us that the core business provides important capital to be invested.

Even though, investors should not overlook the importance of Berkshire’s core business due to following reasons:

  1. The core business – especially the insurance lines up – deliver free cash flow that could be invested in the stock market or if possible, to be financed for the acquisition of another company (see figure 4). Without core business, an investment like Apple, Coca-Cola, and Amex is nonexistent.
  2. Warren Buffett has no intention to be in buy and sell mode. The Oracle buys his investment to be held forever if possible. Berkshire will get benefit from the dividend.
  3. Even when Berkshire wants to cash in all the investment, it will not give a beneficial advantage. For instance, if Berkshire converts all of that 300 billion into cash, what will it do with this massive cash? Berkshire simply has no expertise to exploit this capital.

What do we learn from this? We recommend investors not overestimate the Berkshire investment. It is good when we have it, but it is what it is. Nothing more. If you buy Berkshire, you should not buy solely because of Berkshire’s investment.

The Core Business
Competitive Advantage of Berkshire Hathaway.

Competitive advantage analysis will always be at our disposal.

For the Berkshire case, we have two contributors here. Or three.

The first is the insurance segment. The darling, the most Warren Buffett love. Honestly, the insurance segment business edge should be self-explanatory. The customer pays regularly for something that he/she insured for a whole lifetime. If the insured is a car, the customer pays as long as the car is owned. If it is life insurance – which we like – customers pay for a lifetime.

The edge? Simply, it is a lifetime contract. Why does a customer switch to another provider if he/she has paid an amount of money for the current insurance?

The second is the transportation: Burlington Northern Santa Fe.

We have covered it here, but to give you quick insight, the advantage is its cost. It uses coal as fuel and could carry a massive amount of goods and products, covering a wide area. It could carry heavy things, something that is unmatched even by UPS or Amazon delivery.

This short explanation gives us a clear picture of how excellent is Berkshire’s business.

The Final Words
A perspective of Berkshire Hathaway.

We encourage you to look at Berkshire Hathaway as an integral company. It has a good investment approach and durable core business which support that investment. No company in this world has that unique characteristic.

We like to own Berkshire stock, but if one of those vital components (the core business and the investment excellence) disappears or erodes, we no doubt dump our position.