Analyst Note| Greggory Warren, CFA |
We've increased our fair value estimate for wide-moat-rated Berkshire Hathaway to $480,000 per Class A share from $440,000 and $320 per Class B share from $293 after updating our near- to medium-term forecasts for the firm's various operations. We use a 9.0% cost of equity in our valuation, which assumes an increase in the company's U.S. federal statutory tax rate to 26%, from 21% currently. Our fair value estimate is equivalent to 1.42, 1.31, and 1.35 times our estimated book value per share for Berkshire at the end of 2021, 2022, and 2023, respectively. For some perspective, during the past 5 and 10 years, the shares have traded at an average of 1.43 and 1.41 times trailing calendar year-end book value per share. We expect book value to grow at a 15%-20% rate this year (it expanded 26.6% year over year during the first half) and increase at a mid- to high-single-digit rate in 2022. Having forecast a year with an equity market correction, which will affect the contribution from Berkshire's insurance investment portfolio, as well as larger-than-normal catastrophe losses, which will require an increase in loss reserves, we see book value per share declining by the midsingle digits in 2023. The firm is starting the third quarter with an estimated $109 billion in dry powder, but valuations are still running a bit too high for many of the types of quality assets Berkshire would prefer to acquire. Therefore, we expect the bulk of the firm's capital allocation, aside from ongoing capital expenditures, to be focused on stock and bond investments and share repurchases in the near term--with Berkshire's common stock continuing to be the company's best investment option in the near term, in our view.