We are reiterating our Outperform recommendation on Berkshire Hathaway Inc. (BRK.A) (BRK.B) reflecting our continued optimism about the company’s growth prospects. Berkshire carries a Zacks Rank #1 (Strong Buy).
Why Outperform?
Berkshire has shown a strong operating performance over the past many quarters, with growth coming in from all its segments.
Berkshire’s property and casualty insurance business has been the engine behind its growth. The company’s insurance business maintains capital strength at exceptionally high levels. This strength differentiates Berkshire’s insurance companies from its competitors.
Berkshire’s economically sensitive non-insurance businesses – utilities and energy, and manufacturing, service and retail – are performing well after suffering substantial earnings decline in the recent past due to the weak economy. The utilities and energy business is witnessing a substantial growth led by increased revenues from BNSF, the railway which was acquired in February 2010. Revenue from BNSF has been a major contributor to the company’s revenue.
Berkshire’s Finance and Financial Products segment is also performing well after suffering from the soft housing market in the recent past. We expect improving trends in this business segment given that the housing market is improving gradually.
Moreover, Warren Buffett’s unique skills have created tremendous value for shareholders. A strong capital position along with his unique skills in making the right acquisitions has made Berkshire a conglomerate which consists of more than 80 business and equity stakes in many big companies.
With respect to earnings performance, the company delivered positive surprise in the last 4 quarters with an average beat of 23.6%. We expect the trend to continue riding on its strength when its reports third quarter results. The Zacks Consensus Estimate for the third quarter is currently pegged at $1.60, representing a year–over–year improvement of 1.3%. The expected long term growth for the company is 7%.
Other Stocks
Other players from the same industry such as Alleghany Corp. (Y), Everest Re Group Ltd. (RE), Selective Insurance Group Inc. (SIGI), all carrying Zacks Rank #1(Strong Buy) are worth considering.
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