Berkshire Hathaway Just Hit a $1 Trillion Valuation — Is It Too Expensive to Invest?

Berkshire Hathaway (BRK.A 0.74%) (BRK.B 0.88%) joined the exclusive club of trillion-dollar stocks on Wednesday, surpassing a market capitalization of $1 trillion during the day’s trading session. Actually, it is only American company to reach this milestone, which is not a technology company. Quite the contrary, indeed – Berkshire has managed to grow to a trillion dollar valuation with a collection of businesses that many investors consider “boring”.

With the stock now about 40% above its 52-week low and about 135% over the past five years, it might seem like Berkshire is getting a little overpriced. So let’s take a closer look to see if this is indeed the case.

A difficult stock to evaluate

Admittedly, Berkshire is a difficult stock to value. Not only is it a collection of over 60 subsidiaries, but it has a massive stock portfolio and plenty of cash on its balance sheet. The latter two components make the company look deceptively expensive by most valuation metrics.

Additionally, due to an accounting rule, Berkshire must include unrealized losses and gains on its stock portfolio in its earnings calculations, essentially rendering the traditional price-to-earnings (P/E) ratio useless. In addition, CEO Warren Buffett himself has gradually put less emphasis on the book value of the company, which has long been his indicator of business valuation.

Fortunately, two of the three components are fairly easy to assess individually. We’ll start with Berkshire’s global market cap, which is almost exactly $1 trillion at the time of this writing, so we’ll use that figure.

First, Berkshire has $277 billion in cash and cash equivalents on its balance sheet. This gives the company unparalleled financial flexibility to take advantage of opportunities that arise, but in the meantime generates billions in interest income for Berkshire. Sustaining this brings the market cap down to $723 billion.

Next, Berkshire’s stock portfolio has a collective market value of about $318 billion. Removing that from the equation shows that the market values ​​Berkshire’s operating businesses at $405 billion.

Is Berkshire Hathaway Too Expensive?

So we have a business that has a market value of just over $400 billion. Over the past four quarters, Berkshire generated $42.1 billion in operating earnings from its subsidiaries.

This implies that if we withdraw Berkshire’s stock portfolio and cash — both of which have simple market values ​​– Berkshire’s real value. business they collectively trade for about 9.5 times trailing 12-month earnings.

Even if we strip out investment income — which is included in operating earnings because the interest in Berkshire’s cash is technically held mostly in Berkshire’s insurance business — the company still generated $30.9 billion dollars in profit. That would translate to a price-to-earnings multiple of about 13. And that’s for a collection of largely recession-proof businesses that have grown operating earnings 26% year-to-date through 2024 .

I’m not sure this would qualify as “expensive” by almost any definition.

The bottom line is that while Berkshire’s stock has performed well over the past year, that doesn’t make it an expensive stock. This is still a reasonably priced collection of businesses, assets and cash, and there’s no reason to believe Berkshire can’t continue to deliver strong returns for years to come.