Bailey Pemberton
4 min read
Berkshire Hathaway has delivered a powerful run over the past few years, and that raises a simple question for anyone looking at the stock today: Is the current price supported by the returns the conglomerate earns on the capital it controls across its wide mix of operating businesses and investments?
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Over the past 5 years, Berkshire Hathaway has returned 101.9%, which puts the spotlight on whether those gains reflect the underlying rate of return the group can generate on its capital base.
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Recent moves such as adding to Sirius XM, enjoying a rising dividend stream from Coca Cola and committing more capital to Bending Spoons all feed into how efficiently Berkshire can reinvest cash, which may support or limit future value creation from here.
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If you’d rather focus on earnings, this one’s for you. See what Berkshire Hathaway’s 14.5x P/E says about the price.
The issue now is whether Berkshire Hathaway’s recent share price level is justified by the returns it actually earns on the capital entrusted to it.
If you are evaluating Berkshire Hathaway based on the returns it generates on its capital, it can be useful to compare those figures with other companies that perform well on similar quality checks and valuation filters, starting with 35 high quality undervalued stocks
Is Berkshire Hathaway a Bargain on Excess Returns?
The Excess Returns model looks at how much profit Berkshire Hathaway earns above the cost of its equity capital. On this view, the group is treated as a collection of businesses and investments that must clear a high hurdle before creating economic value for shareholders at a price of $869,300.76 per share.
Berkshire Hathaway is modeled with Book Value of $522,225.90 per share and Stable EPS of $65,319.23 per share, based on a median return on equity history, against a Cost of Equity of $40,996.54 per share. That gap produces an Excess Return of $24,322.69 per share, supported by an Average Return on Equity of 11.91% on a Stable Book Value assumption of $548,342.09 per share drawn from two analyst estimates. Because the recent investment in Bending Spoons channels more capital into operating businesses, the Excess Returns output suggesting intrinsic value is meaningfully above the current share price points to the market placing a cautious price on those reinvestment choices. Find out what Berkshire Hathaway could be worth using our Excess Returns estimate.
The Berkshire Hathaway Narrative: What Would Justify Today’s Price?
Narratives on Berkshire Hathaway pick up where the valuation puzzle leaves off, by spelling out which assumptions about future growth, margins and earnings would need to hold for the stock to sit materially above or below today’s price on Simply Wall St’s Community page. Each narrative lays out its own fair value framework in plain terms so you can see the inputs behind the calculation and compare those expectations with Berkshire Hathaway’s reported results over time.
