Berkshire Hathaway (BRK.A) is well-known as the conglomerate holding company of value investor Warren Buffett. But before it was owned and operated by the billionaire, Berkshire Hathaway was a humble textile manufacturer. Buffett then purchased and invested in insurance companies--effectively moving the firm into its second life--and the rest is now history.
As the holding company recently fell below $100,000 to its lowest valuation in decades and as Buffett nears retirement, Berkshire Hathaway is emerging into its third life. Accordingly, now is the time to consider investing in this event-driven situation. I believe that the firm will safely provide returns slightly above that of the market in the following decades.
Nevertheless, many investors have voiced concerns about succession issues at the firm, despite the fact that Buffett has signaled a plan. If there is one issue I believe to be exaggerated in the area of corporate governance, it is CEO succession planning. Buffett's plan entails having investment partners oversee groups of holdings alongside a CEO. This plan is a logical continuation for the firm, as it depends on a few key people running the operations. However, plans are just plans. Investors should reason that the fundamentals, not the plans, are what drives growth in business. Most assuredly, Buffett has a strong plan to gradually replace current management; accordingly, this is an issue that the market has gotten unnecessarily worked up about.
The company's strategy has been to maximize ROIC above WACC in the long-term. While Buffett has the greatest track record in implementing this, he does not control a monopoly on investment skills. Furthermore, the principles of investing have not changed since Buffett began his legendary career, only the context in which these principles operate. Consequentially, a Berkshire Hathaway without a Buffett does not spell nearly the sort of decline the market expects. Betting against the naysayers could prove profitable in the next three years as the market recovers.
Berkshire Hathaway is also well-diversified in a variety of industries: energy, finance, retail, railway, furnishings, jewelry, insurance, utilities, apparel, manufacturing, publishing -- is there something that I missed? It trades at roughly 17x forward earnings, offers no dividend yield, and has a beta of 0.61, making it largely protected from a double-dip. The holdings are largely undervalued, and I am particularly bullish on railways, but together, the sum is not nearly as integrated as I would prefer. GEICO and General Re provide an exception. In addition, several of the companies have seen market share declines, particularly MidAmerican Energy Co., which has seen weak growth.
It is ironic that the company's growth inevitably turns it more and more into a pseudo-index fund tracking the market. Buffett has mentioned how his firm is no longer able to get the types of returns it has in the past--this is due to the reality that the capital has to be increasingly spread out in bets that provide returns along a normal distribution. With more bets, overall return becomes more correlated with the market. In almost every segment of Berkshire Hathaway, the company has spread investments across many firms. For example: Although Marmon, McLane, and Shaw Industries contribute significantly to the manufacturing segment, HH Brown Shoe Group, Forest River, Fruit of the Loom, Richline, and many others also contribute. With so many holdings, I find the upside and downside both limited.
With that said, I believe in Buffett's strategy and the fundamentals of Berkshire Hathaway. For those looking to get returns just above the S&P in the long term, I see no reason to believe that Berkshire Hathaway is not a safe investment. Analysts currently rate the company slightly above a "hold," and consensus estimates for EPS are that it will decline by 6.7% in 2011 to $6,320 and then increase by 21.6% the next year. However, I see a much brighter future for the company than what the market anticipates.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.