Berkshire Hathaway

Moat: 4/5

Understandability: 2/5

Balance Sheet Health: 5/5

Berkshire Hathaway is a multinational conglomerate holding company, best known for its insurance, railroad and energy businesses, along with a massive investment portfolio spanning numerous sectors.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Explanation:

Berkshire Hathaway is unlike most companies, acting as a holding entity for a diverse range of businesses. It operates primarily within four main sectors:

  • Insurance: This is the core of Berkshire’s operations, encompassing a multitude of insurance companies such as GEICO, General Re, and Berkshire Hathaway Primary Group. These businesses provide property, casualty, life, and health insurance. Their business model is to collect premiums up front and then pay out claims later. In addition, it has also its own reinsurance business where it insures insurers. This gives them an immense advantage because of float, which is the money held by insurance companies before payout, which can be invested for profit.
  • Railroad and Energy: This segment includes BNSF Railway, one of the largest freight railroad networks in North America. Berkshire Hathaway Energy comprises a variety of utility and energy-producing businesses, including natural gas, electricity generation, and renewable energy facilities.
  • Manufacturing, Service, and Retailing: This segment encompasses diverse businesses from consumer products (like Duracell batteries and Fruit of the Loom apparel) to retail businesses (like jewelry and furniture companies) to services (such as flight training services and building material distribution).
  • Investments: Berkshire also maintains a massive portfolio of publicly traded and privately held companies. These holdings span various sectors, from financial institutions like American Express and Bank of America to consumer staples like Coca-Cola and Kraft Heinz, and they own big portions of some publicly traded companies.
  • Insurance: The insurance industry is constantly changing due to a variety of factors like regulatory changes, new claims trends, and advancements in technology. The shift is toward data analytics and automation, leading to more efficient claims processing and cost savings.
  • Railroad and Energy: Railroads are increasingly important for efficient and lower-cost transportation of goods. In the energy sector, there is a growing shift toward renewable energy sources, and companies are trying to adapt to changing regulations and market demands.
  • Manufacturing, Services, and Retailing: Increased competition is changing the game of manufacturing and retailing with online companies dominating as well. Businesses must adapt to be relevant and stay competitive.

Moat Analysis:

Berkshire Hathaway’s moat is built on a combination of factors, providing it with a strong, although not unbreachable competitive advantage, a moat rating of 4 out of 5 is warranted:

  • Strong Brands: Some Berkshire companies have powerful and long-lasting brands like GEICO, Coca-Cola and See’s Candies. These are hard for other companies to compete with.
  • Diversification: With their broad range of businesses and massive investment portfolio, they are not overly reliant on any particular industry.
  • Economies of Scale: BNSF Railway and Berkshire Hathaway Energy are able to reduce their per-unit costs by increasing their overall scale, making it hard for others to compete.
  • Unique Access to Capital: Berkshire is able to secure funding that would be unattainable by other companies. It also can reinvest profits at high rates of return. This is a core driver of its value.
  • Management Competence: Berkshire Hathaway’s management team under Warren Buffet has a long track record of superior capital allocation and risk management. The management also prioritizes long-term thinking above short-term gain and profits.
  • Low-Cost Structure: By choosing to run businesses efficiently and by being able to maintain a lean operating system, several Berkshire holdings are able to operate with lower costs.

Risks to the Moat and Business Resilience:

Despite its strength, Berkshire faces several risks that could erode its moat and resilience:

  • Succession Planning: The departure or passing of Warren Buffett, who is a key figure in their success, could lead to a change in company direction, loss of investor confidence, and lower returns for shareholders. This risk will be minimized if the new management proves equally successful.
  • Regulatory Changes: The insurance and financial sectors in which Berkshire operates are subject to constant regulatory changes. These changes can impact their competitive advantage or reduce profitability. They may require restructuring or limit the number of investments.
  • Market Fluctuations: Berkshire’s investments in various sectors exposes it to fluctuations of the market and business cycles, which could reduce its investment value.
  • Disruptive Technology: Changes in technology can disrupt their businesses, and failing to adapt would greatly harm them.
  • Competition: Some parts of Berkshire’s business are exposed to significant competition in their markets that may erode profitability and increase cost.
  • Overpaying for Acquisitions: Berkshire is known for the strength of its value-investing approach that looks for cheap but high-quality businesses. But the company’s history is not free from instances of overpaying for companies or buying subpar businesses. This is a risk that needs to be constantly monitored.
  • Macroeconomic Factors: Any significant economic downturn in the U.S. or global economy could reduce Berkshire’s profits and returns due to an impact on its various businesses or investments.

Detailed Financials

Understanding Berkshire’s financials is different from understanding the finances of a typical single-business company. Instead, you have to look at their core businesses and the returns on them individually, as well as their overall investment results and debt. The company does not provide consolidated revenue or profitability metrics by division, thus it is difficult to look at their financials in a traditional manner.

Key elements in their financials include:

  • Revenue Distribution: Revenue is generated from various segments, including insurance premiums, transportation revenues (from BNSF), energy sales, manufactured products, and retail operations. However, the company does not provide a specific breakdown in their financials or quarterly reporting.
  • Profitability: The company’s operating profit is generated by the above mentioned segments, along with insurance underwriting and investment profits. Again, these are not provided separately to any degree. The company, however, mentions that “reinsurance produced an underwriting loss”, while their other insurance businesses, as well as BNSF, did relatively well.
  • Investment Performance: Berkshire’s investment profits are derived from the dividend payments it receives along with increases in the value of the businesses themselves. The company’s largest gains have been in Apple stock, but their biggest holdings include more than 50 large companies. In the first 9 months of 2023, Berkshire’s investments increased in value by $45.9 billion.
  • Cash Flow: The company operates as a cash-generating machine that utilizes the insurance float and other earnings to invest in other businesses. Thus, they are constantly increasing their cash flow over time and are always on the lookout for new avenues of investment. The free cash flow for 2022 was ~$24.7 billion, and the cash balance of the company was more than $147 billion at the end of Q3 2023.
  • Capital Allocation: Berkshire has a history of buying back its own stock, and it has a long history of buy-and-hold value investing. Their philosophy of buying great companies at great prices has produced phenomenal returns over long periods of time.
  • Debt: The debt portion of Berkshire’s balance sheet is minimal compared to its asset base and equity. However, in its transportation, manufacturing and service companies it carries some debt with it, while its insurance, banking and investment businesses have virtually none. This structure enables it to have consistent cash flow and minimize risk.

Recent Issues & Controversies

Berkshire Hathaway, especially its CEO, Warren Buffett, has received criticism for a lack of succession planning. Moreover, they also received criticism for their massive holding in Occidental Petroleum given the climate risks and negative press around the company. There is also criticism about how Berkshire makes use of its cash by not making large acquisitions or putting the money to use in better ways.

Understandability Rating: 2/5

Berkshire is difficult to understand for most investors because:

  • Complexity of operations: The conglomerate operates across various industries, each with its unique drivers, making it difficult to fully grasp the entire organization.
  • Lack of transparency: Due to its size and multiple holdings, Berkshire tends to have a complex financial structure with limited transparency. They do not break out each division with their respective results, making it difficult to look at the different businesses.
  • Investment decisions: The performance of Berkshire Hathaway is greatly impacted by the investment portfolio, which makes it very difficult to predict the future given their holdings are constantly changing.

Balance Sheet Health: 5/5

Berkshire Hathaway has an extremely strong balance sheet with high cash holdings, relatively low debt, and well-managed assets. Its long history of profitability, combined with consistent earnings growth and cash generation, is why it scores a 5/5 in balance sheet health:

  • High cash reserves: Berkshire’s massive cash reserves provide a significant financial buffer, which means they can comfortably weather major economic downturns.
  • Low debt: The company maintains low debt in relation to assets, making them a safe bet with low financial risk.
  • Prudent Investments: Berkshire is known for its disciplined approach when it comes to making acquisitions and capital allocation, making it more stable and reliable.
  • Diverse Holdings: Its massive diversification in different sectors provides stability in a case that certain industries are performing poorly, it has others to hold the load.