Berkshire Hathaway (BRK.A 0.40%) (BRK.B 0.37%) shares have dropped 12% since hitting a record high of $540 earlier this year. Yet, every Wall Street analysts following the company thinks the stock is undervalued at its current price of $477: Target prices range from $485 per share on the low end (implying 1% upside) to $597 per share on the high end (implying 25% upside).
Nevertheless, before buying the dip, investors should consider Berkshire's latest quarterly results and Warren Buffett's actions concerning share buybacks. Here are the important details.
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Berkshire owns a collection of competitively advantaged businesses
Berkshire Hathaway is a holding company that owns a diverse group of subsidiaries, most of which were hand selected by CEO Warren Buffett due to their sustainable economic moats and excellent leadership. The most consequential holdings are its insurance businesses, which generate investable capital in the form policy premiums that have not yet been paid out in claims.
Buffett has invested those funds to great effect over the years. Under his leadership, Berkshire has acquired complete or partial stakes in outstanding businesses, including Apple, Coca-Cola, GEICO, and BNSF Railway. In turn, its book value per share -- a good measure for changes in intrinsic value -- increased 210% in the last decade, outpacing the 200% return in the S&P 500 (^GSPC 0.03%).
Berkshire's revenue and operating earnings declined in the second quarter
Berkshire shares dropped 3% after the company announced its second-quarter financial results earlier this month. Revenue fell 1% to $92.5 billion and operating earnings (which exclude gains and losses on stocks) declined 4% to $11.1 billion. The primary culprit was a 12% decrease in insurance underwriting profits, partially offset by a 19% increase in railway profits.
Looking ahead, many economists expect tariffs imposed by President Trump to slow gross domestic product (GDP) growth, which could lead to more lackluster financial results from Berkshire. Argus analyst Kevin Heal recently wrote, "Berkshire's revenues are economically sensitive and often expand or contract along with the U.S. economy."
The company is particularly vulnerable through its manufacturing, services, and retailing segment, which includes consumer goods brands such as Fruit of the Loom and Duracell, as well as quick service restaurants such as Dairy Queen. Berkshire is also vulnerable through its rail transportation segment, where tariffs could lead to lower freight volumes as consumer and business spending slow.
Warren Buffett has not repurchased any Berkshire stock in four quarters
Berkshire in some ways has become a victim of its own success. The company had a book value of $668 billion as of June 30, by far the largest of any American company. Book value is sometimes called GAAP net worth, and Berkshire's net worth is so prodigious that very few acquisitions or stock purchases could move the financial needle for the company.
Buffett noted that problem in his 2023 shareholder letter. "There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others," he wrote. "All in all, we have no possibility of eye-popping performance."
Importantly, Buffett evidently thinks Berkshire stock is overvalued at its current price. I say that because after repurchasing $78 billion in stock over a 24-quarter period that began in 2018, he has not repurchased stock in the last four quarters. Berkshire's buyback program permits share repurchases any time Buffett believes the price is below the intrinsic value. So, it stands to reason that condition has not been satisfied recently.
Put differently, Buffett has never believed Berkshire traded at a discount to its intrinsic value at any point in the past year. And shares have essentially traded sideways since the second quarter, so I doubt his opinion has changed. To that end, I think investors should either avoid the stock right now, or else keep purchases very small.
