Wall Street analysts are paid lots of money to undertake the challenging task of figuring out what a company is worth. Most focus on one industry and cover the companies in it.
Few companies, however, are harder to value than Berkshire Hathaway (BRK-A) (BRK-B), the $360 billion multi-faceted, conglomerate run by billionaire Warren Buffett. Considered an insurance company, Berkshire Hathaway also owns a railroad, an energy company, a battery company, and even a candy company.
Not only is the company massive, it doesn’t hold earnings conference calls nor does it hold regular investor meetings.
Yahoo Finance spoke with Cliff Gallant, Barclays’ Jay Gelb, and KBW’s Meyer Shields – all three insurance industry analysts – to see just what it’s like to cover Berkshire Hathaway.
Note: Yahoo Finance spoke to Gallant before it was reported that he was no longer with Nomura.
Berkshire analysts agree that it takes a team
“It's a wide breadth of coverage areas. And these aren't small companies - they're big players. You have to employ somewhat of a team approach. Our rail expert helps a lot.”— Gallant
“We start with expertise in insurance, but of course that’s only about 20% of the business. We have to learn, understand, and be able to model what we think the rest of the business will do.” — Gelb
“I can claim some familiarity with insurance, but investors deserve better insights than my own when it comes to Berkshire's other businesses. — Shields
Berkshire doesn’t disclose much, so you listen whenever Buffett speaks
“It's hard to get a lot of detail behind the company that you would typically get from others. You get the 10-Q so you can update your model and can get a look at what's happening. But disclosure is relatively sparse." —Gallant
“The annual letter is a really important window into Buffett’s thinking. And we have the annual meeting. In addition to that, Buffett is in the media pretty often. Anytime Buffett is speaking to the media, we’re listening.” — Gelb
“It’s less a function of its operations' diversity, and much more a function of very stingy and frequently-changing reporting. The reporting is — I believe intentionally — very poor. Mr. Buffett's letter has recently taken to describing the shareholders' role as 'passive', although I don't believe Berkshire's equity investment portfolio managers make their investment decisions with information that is as limited as Berkshire provides to its own shareholders.” — Shields
"It's complex from a balance sheet and corporate point of view and maybe a little bit unpredictable. Mr. Buffett is very good at investing but you never know what he's going to buy next. I never would have thought he’d buy Precision Castparts - even though after the fact it makes sense. Anticipating what he's gonna buy next is tough. The company is changing a lot.” — Gallant
It’s hard to get a hold of management
“Access to management team is very limited. There are some managers that over time you have a relationship with and you might be able to speak with. But there is no investor relations outreach or anything like it.” —Gallant
“We’re in the same boat as everyone else.” — Gelb
“The annual meeting features a rotating panel of analysts that cover Berkshire Hathaway, and I've been consistently excluded from that panel. (In what is undoubtedly a remarkable coincidence, I'm also the only covering analyst that doesn't have the equivalent of a buy rating on the shares)” — Shields
Gallant will be one of three analysts on stage this year asking questions at Berkshire’s shareholders’ meeting on April 30. Buffett began including panel members six years ago. Currently, the panel consists of one buyside analyst, one research anayst, and one insurance analyst along with three media participants asking questions. Until then, it had always been just audience questions. Gallant noted the Berkshire’s view was that the quality of questions had gotten weak. The incorporation of media and analyst questions made the discussion more focused on the company and also elevated the quality of the audience questions as a result.
Valuing Berkshire involves valuing Buffett
"He has a cult following of people who are big fans of him and that makes me worry that the day he is no longer CEO that will hurt the stock a lot. His impact is known as ‘the Buffett Premium.’ I think the valuation doesn’t have much of that in it considering his age.”— Gallant
“Many investors are quite emotional (and hence less objective) about Berkshire Hathaway and Mr. Buffett.” —Shields
Berkshire is significantly exposed to both global macro and industry micro risks
“There has been a slowdown in the manufacturing, industrial, rail businesses. It’s unclear when that’s going to turn around. But as the US economy recovers, we think it will.” — Gelb
"Oil has had a much deeper impact on the company than I would have expected a year ago. It hurt the rail and manufacturing businesses that serve the oil and energy sectors. And even at GEICO, the loss ratio hit a five-year high because consumers were driving more and accidents were up. It had indirect effects on the company that I didn’t anticipate.” — Gallant
“Deals have a lot of risk. Not every deal works right away. General Reinsurance in the late 90s wasn’t great. It took time.” — Gallant
“The key risk is — in my view — the fact that relatively few of its investors have a good understanding of what Berkshire actually does...the reporting is very sparse, and while it's probably ludicrous to question Warren Buffett's investing acumen, I think investors are much more likely to assume the best when there are questions of, say, earnings quality. To me, that widespread positive sentiment implies a greater risk that surprises (perhaps following the inevitable senior management succession) will be negative rather than positive, because the positives have already been assumed.” — Shields
Biggest sources of upside for the stock
“Buffett’s ability to invest. And with so many companies owned in their entirety, it’s a real operating earnings growth story. In 2016, earnings will exceed $20 billion for the first time.” — Gallant
“By far, the biggest opportunity is its relentless cash flow, which is more than adequate to address both capital expenditure needs and continued acquisitions that will themselves augment the cash flow.” —Shields
“Core earnings growth, cost-free float for investment, book value growth potential. The company is well set up for a recovery in the economy in terms of its industrial and manufacturing businesses, as well as the railroad even though that faces some near-term headwinds.” — Gelb
On April 30th, Yahoo Finance will have an exclusive live stream of the Berkshire Hathaway annual meeting. Click here for more information.