Berkshire Hathaway Stock Was Downgraded. Should You Sell?

Susan Dziubinski: I’m Susan Dziubinski with Morningstar. Morningstar recently downgraded the economic moat rating on Berkshire Hathaway BRK.A BRK.B to narrow-moat from wide-moat. As a result, is it time to sell the stock?

Berkshire Hathaway Stock Was Downgraded. Should You Sell?

• Berkshire Hathaway Class A BRK.A
• Berkshire Hathaway Class B BRK.B

Let’s talk about the downgrade first. As a refresher, Morningstar Economic Moat Ratings indicate how long we think a company will be able to fight off competitors and outearn its cost of capital.

When it comes to Berkshire Hathaway specifically, our moat rating comes from an evaluation of each of the firm’s individual businesses, combined with our assessment of management’s ability to produce excess returns from the cash flows that these businesses generate. Historically, Berkshire’s underlying businesses have provided a narrow economic moat, and management’s investment prowess had pushed the firm’s overall economic moat rating to wide.

But today, it’s harder to see Berkshire generating excess returns consistently beyond the next decade. That’s not just because of Berkshire CEO Warren Buffett’s eventual departure. Rather, we’re seeing some slippage in the moats in the railroad business, as well as increased litigation exposure for the utilities and energy business, which put downward pressure on excess returns for Berkshire’s noninsurance operations. Berkshire’s size has also made it difficult to find deals or investments that can add significant value, and there’s increased competition for those deals from private capital. Those factors diminish the potential benefits ahead from management’s ongoing capital allocation.

Does that mean it’s time to sell Berkshire Hathaway’s stock? Not necessarily. The stocks of companies that have undergone moat rating changes can still be overvalued or undervalued. In other words, a moat rating change isn’t a buy or a sell signal. What matters is where a given stock is trading relative to Morningstar’s fair value estimate. And these days, Berkshire Hathaway stock is trading right around our fair value estimates for both its A shares and its B shares. So no, the stock isn’t a sell according to Morningstar’s metrics—it’s a hold.

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Morningstar strategist Greggory Warren provided the research behind this report.

Watch Why These 2 Dividend Aristocrats Look Like Buys Today for more from Susan Dziubinski.