3 Reasons to Buy Berkshire Hathaway

Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) and Warren Buffett are often seen as synonymous. Warren Buffett is Berkshire Hathaway and Berkshire Hathaway is Warren Buffett.

For that reason, investors may look at the ageing -- though still tack-sharp -- Buffett and assume that the fact that he's now 81 years old is a serious threat to the business. To be sure, the exit of Buffett, for any reason, isn't something to be celebrated. However, Berkshire Hathaway is a huge, sprawling empire that is well positioned to continue thriving in the post-Buffett era.

Don't believe me? Here are three key reasons why Berkshire is a stock worth owning -- with or without Mr. Buffett.

1. I got your diversification right here.
What exactly is Berkshire Hathaway? If you go back far enough in its history, it was a textiles business that got obliterated when it became really, really hard to compete profitably as a U.S.-based textile manufacturer. Fast-forward to today, and Berkshire is a big umbrella under which many great companies live.

Berkshire is probably best known for its insurance operations. Not only does it own GEICO -- the auto-insurance giant -- but it also offers business-focused and more esoteric flavors of insurance through Berkshire Hathaway Group and General Re.

But insurance is far from Berkshire's only business. It also has a major stake in the U.S. railroad industry after its purchase of BNSF Railway. It has a regulated-power footprint as well through MidAmerican Energy. And it has a further list of manufacturers and consumer-related businesses too long to list here in full, but the list includes: RC Willey, NetJets, Iscar Metalworking, Fruit of the Loom, Business Wire, Helzberg Diamonds, and Justin Brands.

And let's not forget that with Berkshire there's also the company's multibillion-dollar stock portfolio that includes huge positions in Coca-Cola (NYSE: KO  ) , Wells Fargo (NYSE: WFC  ) , and IBM (NYSE: IBM  ) , among others.

2. Your rock in a hard place.
According to debt-rating agency Standard & Poor's, Berkshire Hathaway is an AA+ company. That rating puts the company on par with the U.S. itself and among the very top of all companies in terms of expected credit risk.

Not that you have to ask S&P to get a good idea of just how stable Berkshire is. The company's balance sheet currently sports more than $180 billion in shareholders' equity against just $61 billion in debt. The company has more than $40 billion in cash and equivalents and an investment portfolio that totaled $135 billion as of June 30. And Berkshire's EBITDA-to-interest ratio -- a key measure of its ability to handle its debt obligations -- is around 12. That measure isn't particularly worrisome until it's around two.

It's a crazy world we live in. Europe is melting down, software glitches are beheading market-making knights, and cynics are trying to bury buy-and-hold investing.

Looking for a port in this crazy storm? Berkshire is it.

3. In a word: valuation.
Now I could weave a truly fantastic story about Berkshire -- its businesses, its management, its investing portfolio -- but if the stock's price was outlandishly high, buying now would only lead to disappointment. But that's not the case.

In fact, it's almost unheard of to be able to get Berkshire stock at the valuation level that it's currently trading at. The chart below shows the stock's price-to-book-value ratio, which is one of the best ways to value an insurance or financial holding company. As you can easily see, rare is the day that Buffett's company sells this cheaply.

BRK.A Price / Book Value Chart

BRK-A Price / Book Value data by YCharts.

Not that this has escaped Buffett's notice. Do you think it's any coincidence that in the fall of last year he made the historic announcement that Berkshire had its finger on the share-buyback trigger? Sure, share buybacks may often be a recipe for disaster, but when we're talking about Warren Buffett, it's anything but.

Buy it like Buffett
My take? Berkshire is a buy. That's why I own the stock in my personal portfolio and have rated it an outperformer in my Motley Fool CAPS portfolio.

But I understand; that's just not enough for some investors. They'd rather buy it like Buffett than simply buy Buffett. So if you'd rather try to walk in Buffett's footsteps and buy what he buys, then you'll definitely want to check out The Motley Fool's special report "The Only Big Bank Built to Last." The report digs into the big bank that tops Buffett's list of favorite banks. You can get a free copy of that report by clicking here.

The Motley Fool owns shares of Wells Fargo, Coca-Cola, International Business Machines, and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway, Coca-Cola, and Wells Fargo. Motley Fool newsletter services have recommended creating a synthetic long position in International Business Machines. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


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  • Report this Comment On August 15, 2012, at 2:09 PM, CromulentBrad wrote:

    as much as i respect warren buffet, i often wonder if even he would buy shares of berkshire today.

    it has never paid a dividend, and it won't as long as warren is around.

    it's also such a massive collection of entities that i wonder where the growth is coming from. unless it buys out ibm and coke entirely, how will berkshire ever grow enough to beat the market?

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