"Buffett's premium is going away": is Berkshire stock still worth buying?

Shares of investment conglomerate Berkshire Hathaway have fallen more than 10% since May 3, when Warren Buffett announced his intention to step down as CEO at the end of the year. Despite this, many analysts see the current pullback as a good entry opportunity - in the spirit of Buffett himself, who has always taught investors to "buy when others are afraid," writes Barron's.

Since May 3, Berkshire shares have fallen in price by about 10%, while the S&P 500 index for the same period rose by 12%. The pressure on the quotes of the company strengthened several factors: the decline in the "Buffett premium" (a decrease in investor confidence in Berkshire after the announcement of the departure of the legendary investor, which leads to the cheapening of shares, despite strong financial performance), weak activity on new investments, the lull in share buybacks and reduced interest in protective assets, notes Barron's.

In addition, investors are concerned that the upturn cycle in the insurance market (Berkshire's key business) is over. Nevertheless, fundamentals remain strong. Berkshire still has a well-diversified business, from insurance and railroads to energy and a giant stock portfolio.

The company has more than $330 billion in cash on its books - a third of the company's total capitalization. This is a powerful financial reserve that can be used to buy back shares, pay dividends or make major deals, the publication says;

Berkshire shares can't be called cheap, but they now look attractive amid an overvalued stock market, said analysts surveyed by Barron's.

"The stock is getting more interesting right now," confirmed Gamco Investors portfolio manager Mac Sykes.

Berkshire's Class A shares are trading around the $725,000 level - 1.6 times the June 30 implied book value of $461,140 - which is in line with the average of recent years. Class B shares are trading at $484. The share price corresponds to about 24 times projected earnings for 2025 - at the S&P 500 level. If earnings are adjusted for stakes in companies such as Apple, Coca-Cola and Bank of America (so-called pass-through earnings, endorsed by Buffett but not part of generally accepted accounting principles), the P/E ratio drops to about 20.

Berkshire's operating profit is about $45 billion a year. If this pace continues, book value could rise to $525,000 per Class A share by the end of 2026. At the current price of $725,000, that means the stock is trading at a price-to-book value (P/B) ratio of about 1.4 - meaning investors are paying 40% more than what a share of the company's assets is worth. 

For Berkshire, this is considered a reasonable valuation because the business is stable and includes intangible assets not reflected on the balance sheet (e.g., brand, management, investment experience), Barron's writes.

"This is a great stock to hold in an uncertain environment," said UBS analyst Brian Meredith, who recommends buying Class A securities. He set a target price of $892,120 (23% above current levels).

"Berkshire is no different than it was in April, before Buffett's resignation announcement," Meredith notes.

Although Buffett will retire as CEO, he will remain chairman in 2026. The company's core businesses - insurance, railroads and energy - are still doing well.

Insurance. Berkshire is the owner of the largest insurers in the world. Insurance rate increases have slowed but are still adding 4-5%, which is favorable for future profits. Berkshire also owns Geico, the third largest auto insurer in the US. Previously a troubled asset, Geico has become profitable after implementing new technology and is poised for growth.

Energy. Berkshire's energy business is among the largest in the United States. It includes regulated power grids, a portfolio of renewable energy assets, a transmission grid and natural gas pipelines. Berkshire Hathaway Energy invests $10 billion annually in infrastructure projects and is likely to benefit from the growth of AI.

Railroads. The Burlington Northern Santa Fe Railway Company, along with Union Pacific, dominates freight transportation in the western United States. Union Pacific's merger talks with Norfolk Southern have fueled rumors that Berkshire may buy CSX (eastbound), creating a multinational network. Such a deal, despite possible antitrust resistance, could cost $80 billion (including a 25% premium to CSX's current price) and boost Berkshire's 2026 earnings by 8%, according to UBS estimates.

Share Portfolio. Berkshire's $300 billion portfolio of securities is probably inferior to the market in 2025, with growth in American Express, Bank of America, Coca-Cola and Chevron offset by a nearly 15% drop in Apple - the largest position in the portfolio.

Still, the strength of the business alone may not be enough to revive the stock's rise. Buffett could clarify what management will look like after he leaves, notes Barron's. 

"Investors are sensitive to generational shifts, and Buffett's premium is slowly moving out of stocks," CFRA analyst Kathy Cyphert notes. - Uncertainty is not conducive to growth."

A possible solution is a major deal: the aforementioned purchase of CSX or, possibly, the entire Occidental Petroleum, writes Barron's. Although Buffett has previously denied interest in a full purchase of Occidental (Berkshire now owns 27%), his successor may look at the situation differently. Occidental CEO Vicky Hollab stated that she would be happy to be part of Berkshire. Such a deal would cost $45 billion - quite an affordable amount for the holding.

Berkshire also owns a 27% stake in Kraft Heinz, and the company said in May that it was considering strategic options. Berkshire could trade its stake for control of the "old" Heinz business - Buffett has always been a fan of Heinz ketchup.

A resumption of the buyback program would signal that Buffett considers the stock undervalued, Barron's stresses. The last buyback took place in May 2024.

Buffett's successor, Greg Abel, who owns $167 million worth of Berkshire stock, also hasn't made a major purchase in a while (most recently in March 2023 at $450,000 per A share). A more active equity stake in the company would help build investor confidence, the publication notes.

In addition, Berkshire could start paying dividends - with its earnings and cachet reserves, it can easily afford a 2% yield, as most companies of this size do. 

In six decades as Berkshire Hathaway CEO, Buffett provided shareholders with an average annualized return of about 20%, writes Seeking Alpha, citing analysts at Karlsson & Partners. 

But the big question now is whether his successor, Greg Abel, can continue this trajectory, or whether Berkshire will finally enter a phase of mature but limited growth.

Analysts from Karlsson & Partners note that without Buffett and without new strategic breakthroughs, the company  risks remaining just a quality "diversified holding" with moderate returns. And for investors expecting a continuation of the legendary story, this may not be enough, they summarize. 

This article was AI-translated and verified by a human editor