Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) should reach record-high operating EPS over the next two years, reaching nearly $16bn by 2014 (12.7% CAGR), with continued growth thereafter. In particular, GEICO, BNSF and the collection of Manufacturing, Service and Retail businesses (roughly 70% of 2013E earnings) should see record-high earnings. So says a new report from Nomura initiation coverage on Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B). Further details from the report below:
Nomura on Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)
Our Berkshire model assumes modest U.S. GDP growth near 3%, but with over 85% of the company’s revenues in the U.S., anything better for the U.S. would mean even greater Berkshire earnings.
Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) has a collection of best-in-class companies, which positions it well in nearly any environment. From strong brands to low-cost distribution models to dominating market shares or limited competition, all of the major Berkshire businesses have sustainable competitive advantages, in our opinion.
Accretive Cash Deployment Is Just a Bonus
- Our EPS and book value projections give no credit for the deployment of $35bn of cash in the hands of Mr. Warren Buffett. Given Berkshire’s reputation and financial strength, we believe there is potential for more high-profile deals with lucrative terms, such those struck with Goldman Sachs, Bank of America, or most recently, Heinz.
- The Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) board has pledged to repurchase BRK/A shares at 1.2x book, which we believe provides a solid floor for investors.
Valuation Does Not Reflect the Fundamental Outlook
- Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) is trading at 1.3-1.4x book value, below its historical mean of near 1.5x and below our sum-of-the-parts valuation of $184,000.
- We expect that the discounted valuation reflects concerns of whether Mr. Buffett can meaningfully continue to grow the huge Berkshire empire through his investing acumen, but this ignores the significant operating earnings of the empire that already exists. Operating company earnings drove approximately two-thirds of BRK’s intrinsic value creation in 2012, but we expect that to grow to be over 80% through 2014.
Investment Summary
We Initiate Coverage with a Buy Rating, $184,000 Target Price
Strengthening U.S. Consumer and Business
Given that Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s companies are generally best of breed and leveraged to the U.S. economy, we expect that as American businesses and consumers regain strength, the company will generate impressive operating earnings, including double-digit earnings growth through 2014. The transition to operating company earnings should drive book value growth, and Berkshire’s reputation and financial strength should enable it to strike deals on favorable terms. Our multiple-based, sum-of-the-parts valuation results in our $184,000 target price and supports our Buy rating.
Growing Earnings Power
We expect Berkshire’s earnings to ramp up quickly and to approach $16bn by 2014 (12.7% CAGR). Our model assumes modest U.S. GDP growth of near 3%, but with over 85% of the company’s revenues in the U.S. and serving American consumers and businesses, better growth for the U.S. would further enhance Berkshire’s earnings power.
In the Underwriting businesses, roughly 24% of revenues, GEICO continues to be a share gainer and should produce double-digit earnings growth, while unit count growth, driven by a growing economy, should help power GenRe. BHRG is aggressively entering the Lloyd’s market, which should further propel its growth rate over the next few years.
In the non-underwriting businesses, we expect combined earnings growth of roughly 11-14% from the various business segments. The railways are benefiting from the U.S. energy boom, economies of scale and the growth in online consumer spending as more consumers take advantage of low-cost shipping. The Manufacturing, Service and Retail (MSR) businesses are also well positioned for growth as both the American consumer and small businesses
