Berkshire Hathaway Inc. Class B

January 25, 2017 Berkshire Hathaway Inc. Class B NYSE: BRK.B - Financial Conglomerates Grade 48.6 Rated 'SELL' since Nov 15th, 2016, when it was do...
Author: Dinah Goodwin
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January 25, 2017

Berkshire Hathaway Inc. Class B NYSE: BRK.B - Financial Conglomerates

Grade

48.6 Rated 'SELL' since Nov 15th, 2016, when it was downgraded from 'HOLD'

Earnings Last Earnings Release Last Qtr. Actual vs. Est.

Quick Facts 11/07/2016 Dividend Yield

N/A

$1.97 / $2.02 52 Wk High

$166.62

Next Release 03/04/2017

$2.02 52 Wk Low

$124.13

Year Ending 12/31/2016

$7.22 Short Interest

Year Ending 12/31/2017

$8.01 Market Cap

1% of float

$160.7 01/24/2017

$396.4B

Overview Company Scores Poor Fundamental Grades MarketGrader currently has a SELL rating on Berkshire Hathaway Inc. Class B (BRK.B), based on a final overall grade of 48.6 scored by the company's fundamental analysis. Berkshire Hathaway Inc. Class B scores at the 67th percentile among all 5875 North American equities currently followed by MarketGrader. Our present rating dates to November 15, 2016, when it was downgraded from a HOLD. Relative to the Financial Conglomerates sub-industry, which is comprised of 31 companies, Berkshire Hathaway Inc. Class B's grade of 48.6 ranks 16th. The industry grade leader is Kingstone Companies, Inc. (KINS) with an overall grade of 72.9. Relative to the Financial Conglomerates sub-industry which has returned 26.62% in the last six months, the stock has performed poorly, up 10.93%, albeit better than the S&P 500's 4.67%. Please go to pages two and three of this report for a complete breakdown of BRK.B's fundamental analysis.

Price, Rating and Sentiment History - 2 Years

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January 25, 2017

Berkshire Hathaway Inc. Class B NYSE: BRK.B - Financial Conglomerates

Growth

B

Acceptable Growth Track Record Offers Plenty of Room for Improvement

Berkshire HathawayClass B has been struggling with anemic sales growth for some time and now, based on its latest quarterly report, it has dipped into negative territory. The bank had total revenue of $217.55 billion in the 12 months ended last quarter, only a modest 23.74% gain from three years earlier, when total revenue in the equivalent 12 month period was $175.81 billion. And now sales have started to decline as evidenced by the 1.96% year-over-year decline recently reported by the company. It said in its latest announcement that last quarter's total sales were $58.61 billion compared to $59.78 billion a year earlier. These results underscore a very worrisome trend marked not only by a recent downturn in Berkshire HathawayClass B's business but also an inability to show sustainable long term growth that could lead to higher profits. It reported also that profit fell last quarter from the year earlier period, impacting also long term profit growth, which has been anemic in the last three years. We base long term profit growth on the change in full year (12-month trailing) net income from the comparable period three years before. Berkshire HathawayClass B's Third quarter net fell 23.65% to $7.20 billion from the year earlier profit of $9.43 billion (excluding extraordinary items) , which contrasts with its growth in 12-month trailing profit over a three year period. Also including last quarter's results, the company's profit grew to $23.27 billion for the 12 months ended September 30, 2016, a 22.22% jump from full year profit of $19.04 billion reported for the period ended three years earlier. The company's margins contracted during the latest quarter with an average 5.80% decline in EBITDA, operating and net margins from a year earlier, reversing the preceding quarter's margin expansion.

Market Growth LT Market Growth ST Dividend Growth EPS Growth Earnings Impact Earnings Surprise

BD N/A A+ B+ D

The company's November 07, 2016 earnings report missed analyst estimates by 2.48%; however, investors reacted positively to the results causing the stock to rise 3.39% after the announcement. Notwithstanding such a positive reaction, this latest report continues a trend of missing analyst estimates; including this latest announcement, in the last six quarters the bank has reported earnings that have been, on average, 8.23% below the Street's consensus estimate. **

Value

B+

Revenue Qtrly. 09/30/2016 Revenue Qtrly. Year Ago Revenue 1 Yr. Chg. Revenue 12 Mo. Tr. Latest Revenue 12 Mo. Tr. 3Y Ago Revenue 12 Mo. Tr. 3Y Chg.

Net Income Qtrly. 09/30/2016 Net Income Qtrly. Year Ago Net Income 1 Yr. Chg. Net Income 12 Mo. Tr. Latest Net Income 12 Mo. Tr. 3Y Ago Net Income 12 Mo. Tr. 3Y Chg.

$58.6B $59.8B (1.96%) $217.6B $175.8B 23.74%

$7.2B $9.4B (23.65%) $23.3B $19B 22.21%

Positive Value Grades Should Be Considered in the Context of a Generally Poor Fundamental Analysis

Berkshire HathawayClass B's stock, currently priced at 20.94 times 12month' earnings per share, trades 21.60% higher than our "optimum" P/E ratio of 17.22. This ratio, calculated by MarketGrader, is determined by the growth in the company's earnings in the last five years, measured over 12-month rolling periods. Based on this formula Berkshire HathawayClass B has grown earnings per share at a 15.04% annualized rate during the last five years. This growth has resulted in strong financial performance, evidenced by the company's Profitability grade. For this to continue, it must reverse its recent margin slide soon. The stock's forward P/E of 20.94, based on the next twelve months' estimated earnings per share, is higher than its trailing P/E as well as the S&P 500's forward P/E of 15.20. Such valuation seems out of line with the company's financial performance and EPS growth prospects, making the stock highly speculative.

Capital Ratio P/E Analysis Price/Book Ratio Price/Cash Flow Ratio Price/Sales Ratio Market Value

48.6

F BD A A+ A

Berkshire HathawayClass B's current market value is 10.00 times its total book value, which seems like an attractive multiple for a financial firm; however, a closer look at the balance sheet reveals that intangible assets such as goodwill account for 85.28% of its stockholders' equity. When these assets are subtracted from its equity, Berkshire HathawayClass B's price to book ratio climbs to 1.47, which is no longer a very attractive valuation. Our bank Price to Book Ratio indicator not only looks at the ratio itself on an absolute scale to determine if the bank's shares are expensive or not. It combines it with the bank's actual tangible equity per share relative to the average of all banks in the MarketGrader system. This is important for investors to analyze since a bank can look cheap simply because the price of the stock is depressed without regard for the actual amount of tangible book value in each share. Two banks with identical ratios seem, from a value perspective, the same at first glance yet one may be a lot riskier than the other if it has little tangible equity. In Berkshire HathawayClass B's case, its $16.08 in tangible equity per share is 237.96% higher than the $4.76 per share bank average. The stock's price to cash flow ratio of 12.19, based on the $13.18 in cash flow per share generated by Berkshire HathawayClass B. in the last four quarters, could be interpreted as investors' unwillingness to pay too much for the company's earnings prospects in light of its overall fundamental weakness. Its price to sales ratio of 1.82, based on trailing 12-month sales, is 86.19% lower than the Financial Conglomerates's average ratio of 13.20, a very large discount to its peers. Our final value indicator looks at the relationship between the company's current market capitalization and its operating profits after deducting taxes. From this perspective Berkshire HathawayClass B's market cap of $396.43 billion , which is only 12.45 times larger than its latest quarterly net income (plus depreciation), seems like an attractive valuation.

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P/E Ratio 12 Mo. Tr. 09/30/2016 Optimum P/E Ratio Forward P/E Ratio S&P 500 Forward P/E Ratio Price to (Tangible) Book Ratio Price-to-Cash Flow Ratio Price/Sales Ratio

22.14 17.22 20.94 15.20 10.00 12.19 1.82

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January 25, 2017

Berkshire Hathaway Inc. Class B 48.6

NYSE: BRK.B - Financial Conglomerates

Profitability

A-

Company's Operations Are Very Profitable and Indicate a Solid Business Environment

Berkshire HathawayClass B has been operating quite profitably in recent quarters, having posted solid returns on shareholder equity in the last 12 months and earning $23.27 billion in net profits, or 10.69% of all revenue booked during the period. However, it lagged its peers' average operating margin, suggesting its industry is very profitable, giving the bank room to improve its results. Operating profit during the period represented 16.22% of revenue, 26.33% lower than the Financial Conglomerates industry average of 17.74%. While Berkshire HathawayClass B's 8.64% return on equity is solid--based on 12-month trailing earnings--it represents a slowdown from the year-earlier period's return on equity of 9.17%. Our system looks at this ratio in an attempt to measure management's efficiency in rewarding investors in the company's common stock. The bank's 12-month trailing return on assets, which averaged $583.86 billion during the period, was a strong 3.98% even though this represents a decline from the 4.25 return for the equivalent period ended a year earlier. Still, the latest figure exceeded the bank's industry average return on assets of 0.78%.

Net Interest Margin Return on Assets Operating Margins Relative Margins Return on Equity Solvency Ratio

N/A A+ ABBA+

Berkshire HathawayClass B currently has, according to its most recent filing, 0.00% of total risk weighted assets in Tier 1--or core--capital, which includes common stock and noncumulative preferred stock. While this ratio is higher than the 0.00% Tier 1 Capital ratio from a year earlier, it is still in violation of the 4% regulatory minimum. Since banks are required to assign weights to all assets based on their level of risk in order to determine the size of their required reserves, Berkshire HathawayClass B's ratio suggests a significant amount of assets once deemed as safe by the bank have stopped performing, raising their risk level, while the bank has apparently been unable to raise enough fresh capital to meet required minimums, much less to get closer to the 12.43% average Tier 1 capital ratio of all banks followed by MarketGrader. If this situation persists much longer regulators are likely to intervene the bank and seize its assets. The amount of non-performing assets on the bank's balance sheet is excellent, accounting for only 0.00% of its tangible equity plus its reserves for loan and asset losses, a number we refer to as the solvency ratio. More importantly, the current ratio is below the year ago level, which indicates the bank is managing its few troubled assets well and has a big enough cushion to withstand any future deterioration of other assets. The bank's solvency ratio is even more impressive when compared to the average of all banks followed by our system, in which non-performing assets represent 11.69% of their tangible equity plus their loss reserves. Berkshire HathawayClass Bs' goodwill and other intangibles, which were excluded from our solvency ratio calculation, accounted for 85.28% of its tangible equity.

Cash Flow

B-

While the Company's Cash Flow Indicators Are Mediocre They Don't Reveal Any Immediate Liquidity Problems

Berkshire HathawayClass B's cash flow fell slightly during the last quarter to $9.86 billion from $10.21 billion a year earlier, a 3.45% decline. What's more important and worth highlighting is the fact that up to the most recent quarter the company's twelve month trailing cash flow was growing very healthily, up 1.56% compared to the same period ended a year before. This marks a sharp slowdown in the company's business environment and is likely to put considerable pressure on its margins. While our Capital Ratio indicator focuses on the bank's Tier 1 capital, which includes preferred stock and similar securities, our Tangible Equity Ratio indicator offers a stricter analysis of the bank's capital adequacy. This is because it focuses on tangible equity, which not only reflects just common stock, but also excludes goodwill and other intangibles, and compares it to tangible assets. Last quarter Berkshire HathawayClass B had $39.64 billion million in tangible equity, which divided by $374.42 billion of tangible assets results in an excellent tangible equity ratio of 10.59%. And even though this represents a decline from last year's ratio of 21.30%, it shows the bank has enough capital not only to absorb potential operating losses but also to increase its lending and expand its business. The bank lowered the amount of reserves it sets aside to deal with future loan and asset losses last quarter from the most recent comparable period, probably because it feels its $0.00 million in non-performing assets is still well below its tangible equity, as measured by our Solvency Ratio indicator. Nevertheless, its current loss reserve ratio is dangerously low. Berkshire HathawayClass B now has only $0.00 in reserves for loan and asset losses for every dollar in non-performing assets, down from $0.00 in the **sLostReserveRatioDate**. Increasing its reserves will likely come at the expense of future earnings and its overall profitability.

Cash Flow Growth Tangible Com. Equity Loss Reserve Ratio Yield Analysis Interest Ratio Dividend Yield

D A+ N/A D N/A F

** Berkshire HathawayClass B does not pay a dividend and hasn't done so within at least the last five years.

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Cash Flow Qtrly. 09/30/2016 Cash Flow Qtrly Year Ago Cash Flow 1 Yr. Chg. Cash Flow 12 Mo. Tr. Latest Cash Flow 12 Mo. Tr. 3Y Ago Cash Flow 12 Mo. Tr. 3Y Chg. Free Cash Flow Last Qtr.

$9.9B $10.2B (3.45%) $32.5B $25.5B 27.34% $6.6B

Economic Value Total Invested Capital Return on Inv. Capital Weighted Cost of Equity Weighted Cost of Debt Total Cost of Capital Economic Value Added

$371.1B 9.56% 6.12% 0.70% 6.82% 2.75%

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January 25, 2017

Berkshire Hathaway Inc. Class B 48.6

NYSE: BRK.B - Financial Conglomerates

Profile Berkshire Hathaway, Inc. is a holding company owning subsidiaries engages in a number of diverse business activities. The most important of these are insurance businesses conducted on both a primary basis and a reinsurance basis. Berkshire's operating businesses are managed on an unusually decentralized basis. There are essentially no centralized or integrated business functions such as sales, marketing, purchasing, legal or human resources and there is minimal involvement by Berkshire's corporate headquarters in the day-to-day business activities of the operating businesses. Its insurance and reinsurance business activities are conducted through domestic and foreign-based insurance entities. The company's insurance businesses provide insurance and reinsurance of property and casualty risks world-wide and also reinsure life, accident and health risks world-wide. Berkshire's four underwriting groups are: GEICO, General Re, Berkshire Hathaway Reinsurance Group and Berkshire Hathaway Primary Group. The company also owns the railroad business of Burlington Northern Santa Fe Corp. and a majority stake in MidAmerican Energy Holdings Co. The company was founded by Oliver Chace in 1839 and is headquartered in Omaha, NE.

MarketGrader Dilution Analysis Impact of Change in Shares on EPS - Q4 2016 Dilution Summary

*EPS Latest

$2.92

*EPS Year Ago

$3.82

EPS Change 1 Yr.

(24%)

C. Shares - Latest(M)

2,466

C. Shares - Yr Ago(M)

2,465

C. Shares - 1Yr Chg.

0%

EPS if Yr. Ago Shares

$2.92

EPS Chg. if Yr. Ago

(24%)

EPS Loss from Dilution

$0.00

*Earnings per share are based on fully diluted net income per share excluding extrodinary items. This number may not match the headline number reported by the company.

Key Facts: 3555 Farnam Street Omaha ,NE 68131 Phone: www.berkshirehathaway.com Biggest Company in Sub-Industry Berkshire Hathaway Inc. C Grade 48.6 Market Cap:$396.43 billion

Smallest Company in Sub-Industry Northfield Capital Corpor Grade 64.8 Market Cap:$0.08 million

Income Statement

Last Qtr (09/2016)

Revenue

$58.6B

$217.6B

Op. Income

$11.1B

$35.3B

Net Income

$7.2B

$23.3B

*EPS

$2.92

0

12 Mo. Trailing

*Earnings per share are based on fully diluted net income per share excluding extrodinary items. This number may not match the headline number reported by the company.

Balance Sheet

Latest

Total Assets

$604.0B

Total Debt

$101.8B

Stockholders Eq.

$269.3B

All numbers in millions except EPS

Ratios Price/Earnings (12 mo. trailing)

22.14

Price/Tangible Book

10.00

Price/Cash Flow

12.19

Price/Sales Earnings Yield

Total Assets Intangible Assets Long Term Debt Total Debt Book Value Enterprise Value

$604.0B $229.6B $99.8B $101.8B $269.3B $17.0B

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Gross Margin last Qtr. EBITDA Margin last Qtr. Operating Margin last Qtr. Operating Margin Sub-Industry Avg. Operating Margin 12 mo. trailing Net Profit Margin Last Qtr.

26.50% 22.79% 18.96% 17.74% 16.22% 12.28%

1.82 0%

Net Interest Margin

0.00%

Return on Equity (12 mo. trailing)

8.64%

Return on Assets (12 mo. trailing)

3.99%

Capital Ratio - Core

0.00%

Tangible Common Equity Ratio

10.59%

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January 25, 2017

Berkshire Hathaway Inc. Class B 48.6

NYSE: BRK.B - Financial Conglomerates

Top Down Analysis Financials Stocks in Sector: 1217 Buys: 237 (19.47%) Holds: 301 (24.73%) Sells: 679 (55.79%) No. of stocks at: 52-Wk. High: 115 52-Wk. Low: 4 Above 50 & 200-day MA: 792 Below 50 & 200-day MA: 114

#

Ticker

1

SKT

Grade 88.06

N

Tanger Factory Outlet Centers, Inc.

2

SPG

87.59

N

Simon Property Group, Inc.

3

LAMR

85.65

P

Lamar Advertising Company Class A

4

SGE.CA

83.02

N

Strategem Capital Corporation Class A

5

TCO

82.59

N

Taubman Centers, Inc.

6

RUF.UT.

79.63

N

Pure Multi-Family REIT LP Class A

7

PSA

79.54

N

Public Storage

8

ALX

79.07

N

Alexander's, Inc.

$440.80

10/31/2016

9

RHP

78.24

P

Ryman Hospitality Properties, Inc.

$63.20

11/02/2016

10

ORC

76.76

P

Orchid Island Capital, Inc.

$11.87

02/21/2017

48.58

P

Berkshire Hathaway Inc. Class B

$160.72

03/04/2017

593 BRK.B

Financial Conglomerates Stocks in Sub-Industry: 31 Buys: 5 (16.13%) Holds: 10 (32.26%) Sells: 16 (51.61%) No. of stocks at: 52-Wk. High: 0 52-Wk. Low: 0 Above 50 & 200-day MA: 21 Below 50 & 200-day MA: 4

1. Price Trend.

Name

Price

Next EPS

$34.73

02/14/2017

$184.14

10/27/2016

$75.59

11/04/2016

$1.89

N/A

$71.59

02/15/2017

$8.53

11/11/2016

$222.39

02/23/2017

Ticker

Price

Next EPS

1

KINS

72.91

P

Kingstone Companies, Inc.

$12.50

03/23/2017

2

AXP

69.53

P

American Express Company

$77.43

04/19/2017

3

NFD.A.C

64.79

N

Northfield Capital Corporation Class A

$22.00

N/A

4

AVAL

62.71

P

Grupo Aval Acciones y Valores Grupo

$8.27

11/30/2016

5

SLF.CA

62.70

P

Sun Life Financial Inc.

$51.60

02/15/2017

6

TCPC

58.81

P

TCP Capital Corp.

$16.94

11/09/2016

7

SLF

57.39

P

Sun Life Financial Inc.

$39.24

02/15/2017

8

MKZ.UT.

56.74

N

Mackenzie Master Limited Partnership

9

JPM

55.30

P

10

C

52.68

16

BRK.B

48.58

3. Earnings Guidance. B+

Sentiment

Name

#

A+

Grade

Sentiment

$0.95

N/A

JPMorgan Chase & Co.

$84.72

04/13/2017

P

Citigroup Inc

$56.74

04/13/2017

P

Berkshire Hathaway Inc. Class B

$160.72

03/04/2017

2. Price Momentum.

C

4. Short Interest.

A+

8.6

Copyright 2010 MarketGrader.com Corp. All rights reserved. Any unauthorized use or disclosure is prohibited. Neither the information nor any opinion expressed constitutes an offer to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regards to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. MarketGrader does not make markets in any of the securities mentioned in this report. MarketGrader does not have any investment banking relationships. MarketGrader and its employees may have long/short positions or holdings in the securities or other related investments of companies mentioned herein. Officers or Directors of MarketGrader.com Corp. are not employees of covered companies. MarketGrader or any of its employees do not own shares equal to one percent or more of the company in this report.

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