Because Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) is a conglomerate, investors in the corporation must put a lot of effort into valuing its various components. They occasionally find a golden nugget in that search, though. This essay will demonstrate that Berkshire Hathaway Energy’s undervaluation is an indicator of the portfolio’s total value.
The Acquisition
Greg Abel, the vice chairman who would take over as chairman of Berkshire Hathaway should Warren Buffett pass away, began his career in 1992 with Berkshire Hathaway Energy (MidAmerican Energy). In 2008, he was named MidAmerican’s CEO, and since then, he has risen through the ranks of Berkshire Hathaway. He acquired a personal 1% ownership in Berkshire Hathaway Energy during that time.
Greg Abel sold Berkshire Hathaway that 1% interest in the most recent quarter for $870 million. It’s interesting to note that the firm incurred a $362 million charge as a result of the discrepancy between the purchase price it paid and the company’s book value, which is just over $50 billion. Together, Berkshire Hathaway currently holds 92% of the company.
The remaining 8% is held by millionaire Walter Scott. After his death in September 2021, his family acquired ownership of that interest. The purchase suggests that the share is worth around $7 billion, and since it is now in his family’s hands, there is a risk that Berkshire Hathaway will pursue complete ownership. We sincerely hope it takes place.
However, one conclusion is how undervalued the conglomerate’s individual parts are. The $362 million charge represents a markdown of almost $30 billion on the company’s 92% share compared to the price it would be ready to pay today. The worth of the company’s big portfolio as a whole can be seen in that discount.
Overview of Berkshire Hathaway Energy
One of our favorite parts of the company for a long time is Berkshire Hathaway Energy, which has a lot of potentials.
There is no doubting that the energy markets are changing, whether or not you pay attention to the facts supporting climate change. Even with the storage devices, solar and wind power are more affordable in many places, such as the southwest United States. As prices decline, that transition is anticipated to continue.
The grid needs to get a significant amount of energy investment at the same time. That direction is being set by Berkshire Hathaway Energy. The company has assets worth $132 billion, revenue of $25 billion, and profits of $4 billion. The company generates almost $6 billion in annually FCF, which in our opinion more than justifies an estimated value of $87 billion.
The majority of these funds will be used by the business for expansion investments. The business made multiple opportunistic investments as a result of the petroleum markets’ decline. If interest rate increases lead to additional weakness, we’d like to see the company profit from it. Although the capital needs were too high for comfort, we thought PG&E represented an opportunity.
In any case, Berkshire Hathaway Energy is an illustration of how the company’s book value for assets is far lower than their true value, together with the company’s share buybacks.
Earnings at Berkshire Hathaway
The company just released its Q2 2022 earnings, which, despite a challenging market, were extraordinarily impressive.
Operating earnings for the corporation were $9.3 billion, although that figure includes $1.1 billion in non-U.S. debt due to exchange rate fluctuations. Thus, genuine earnings for comparison came to about $8.1 billion, still representing a YoY rise of over 20%. For the corporation, this rise in earnings was evident across all operating assets.
The business’s true operating earnings, when annualized, come to about $32 billion. That’s a significant amount for a business with a $350 billion current portfolio value and just over $100 billion in cash that is valued at $650 billion. It indicates that the operational companies of the corporation are valued at about $200 billion, or a P/E ratio of about 7.
Our Opinion
Berkshire Hathaway has resumed operations.
Late in March, the business acquired Alleghany Corporation for just under $12 billion. The biggest acquisition since 2016 was that one. The corporation still bought back an additional $1 billion worth of shares during the quarter, and year over year, the number of outstanding shares is down roughly 4%. We’d like to see that number steadily decline.
Occidental Petroleum currently has a 20% share owned by the corporation. As said above, there is a substantial likelihood that an acquisition offer will be made; nevertheless, we believe Berkshire Hathaway is taking advantage of the market’s instability in an effort to negotiate a price below $60 per share. The corporation still has a non-owned share worth more than $40 billion, which it can easily afford.
During the slump in the oil market, the corporation made a number of opportunistic investments, and it still has a sizable cash reserve. Additional market downturn merely presents more opportunities. Since the company keeps repurchasing shares, we think it is greatly undervalued overall and a good long-term investment.
When searching for long-term profits, the corporation is a wonderful place to store your retirement funds.
Research Risk
The fact that Berkshire Hathaway historically has been a somewhat concentrated company poses the biggest threat to our argument. When earnings declines are taken into account, the company’s official earnings for the quarter total more than $40 billion. The value of Apple accounts for 25% of the whole corporate capitalization.
Because of this, the company’s long-term performance may be harmed by poor performance in a few component companies.
Conclusion
The announcement that Berkshire Hathaway has expanded its interest in Berkshire Hathaway Energy by 1% for $870 million was included in the company’s recent quarterly report. After that transaction, Berkshire Hathaway Energy’s value was shown to be $30 billion higher than what was indicated on the company’s balance sheet.
In addition to having the FCF to support that valuation, Berkshire Hathaway Energy has tremendous room for overall expansion. To emphasize its strength, Berkshire Hathaway as a whole has started making more purchases. We anticipate Occidental Petroleum to be one in the future. In light of all of this, we advise long-term investment in Berkshire Hathaway.
Featured Image: Megapixl @Rafaelhenriquepress
