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Buy Berkshire Hathaway for a 13% Profit? 3 Things You Need to Know

By Rich Smith - Updated Jan 18, 2017 at 11:48AM

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I mean, have you seen the free cash flow on this thing?

This article was updated on Jan. 12, 2017, and originally published on May 6, 2016.

Up 25% over the past year, Berkshire Hathaway (BRK.A -0.15%) (BRK.B -0.17%) stock is a giant of American industry that has outperformed the rest of American industry (i.e., the S&P 500 index, which is up only 17% over the same 12 months). And according to one analyst, you're much better off buying a few shares of Berkshire Hathaway than investing in the S&P. 

Why?

Read on to learn more.


Berkshire Hathaway owns a lot of companies. These are just a few of them. Image source: Berkshire Hathaway.

UBS endorses Berkshire Hathaway stock

In March 2016, the ratings watchers at StreetInsider.com highlighted an unusual move by giant Swiss investment bank UBS, issuing an endorsement for a stock priced well north of $200,000 a share: Berkshire Hathaway A shares. At the time, UBS was only looking closely at Berkshire's A shares, which it rated an outperform and valued at about $244,500 apiece, which would have been about a 13% profit from the stock's price when the note was issued.

Six weeks later, UBS came back to give Berkshire Hathaway another look, and on May 6, 2016, decided to recommend the company's B shares as well. Observed UBS at the time: "Our valuation methodology and outlook for Berkshire [is] the same for both share classes. Class B shares possesses dividend and distribution rights equal to one-fifteenhundredth of that of Class A shares, which will be used in creating an equivalent price target."

And you know what else is the same? To this day, UBS has maintained its "buy" ratings on both Berkshire Hathaway's A shares and B shares.

Too big to fail

Well all-righty then. So what was UBS' "methodology" for recommending Berkshire Hathaway's $200,000-plus price-tagged A shares in the first place? Basically, UBS' reasoning breaks down into two parts. In part 1, examining the risk of buying Berkshire, UBS said it sees: "limited downside given BRK's intentions to repurchase shares at 1.2x book value." (For more on that price target, click here).

Meanwhile on the upside, UBS said that: "We believe that the current uncertain economic and market environment plays into the hands of BRK, with its structural advantages of permanent capital, strong cash generation and industry-leading portfolio of businesses."

Plenty big enough to succeed

Let's take a closer look at two of the things UBS liked most about Berkshire Hathaway: its "portfolio of businesses" and its "cash generation."

Since its origin as a small New England textile maker lucky enough to become the primary investment vehicle of Warren Buffett, Berkshire Hathaway has grown into a conglomerate boasting no fewer than 62 separate subsidiaries, including such famed names as Duracell, Kraft Heinz, and GEICO. Buffett loves to buy these kinds of brand-name companies on the cheap, and since companies tend to get cheaper when the economy hits a rough patch, buying opportunities could start cropping up soon if the economy stalls.

And what happens then? Well, at last report, S&P Global Market Intelligence data showed Berkshire Hathaway with more than $72 billion in cash on its hands, just waiting to be spent on buying new subsidiaries. The company is generating $18.8 billion or more in positive free cash flow annually. To put that in context, at present rates of cash generation, Berkshire Hathaway could conceivably buy itself a company the size of Dollar Tree or Moody's once a year, every year, forever -- until there are no more companies costing under $18.8 billion left to buy.

Berkshire Hathaway could do this, moreover, without touching a penny of its already accumulated $72 billion in cash. Or one magical year, it could blow all its cash and buy something like an AIG, Dow, or DuPont -- and then return to just buying Dollar Trees and Moodys the very next year.

The most important thing

That's just how big and powerful -- and profitable -- Berkshire Hathaway is today. With or without Warren Buffett to lead it, Berkshire Hathaway has become a corporation easily capable of eventually buying up the bulk of the U.S. economy (given enough time). And UBS is right to point this out.

But does this mean that you should buy Berkshire Hathaway stock?

Well, let me put it this way: Buffett himself says he will happily buy back all the Berkshire Hathaway stock available when it's selling for 1.2 times book value. The shares cost 1.5 times book value today -- but if you try to wait for it to sink to 1.2 times book to buy it, you will have to compete with Buffett himself to get ahold of the shares.

Good luck with that.

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$462,890.00 (-0.15%) $-716.49
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$308.64 (-0.17%) $0.53
American International Group, Inc. Stock Quote
American International Group, Inc.
AIG
$56.67 (0.28%) $0.16
Moody's Corporation Stock Quote
Moody's Corporation
MCO
$291.99 (-0.30%) $0.89
E. I. du Pont de Nemours and Company Stock Quote
E. I. du Pont de Nemours and Company
DD
DuPont de Nemours, Inc. Stock Quote
DuPont de Nemours, Inc.
DOW
Dollar Tree, Inc. Stock Quote
Dollar Tree, Inc.
DLTR
$133.59 (2.60%) $3.39

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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