Berkshire Hathaway’s (BRK.A / BRK.B) revenue drop in the sector quarter grabbed headlines, but much of that action can be attributed to the broader market and overall investor sentiment. Tech stocks and financials have been hit this year, but the rest of veteran investor Warren Buffett’s portfolio may make the Berkshire stock worth buying right now.

"We continue to believe that the Berkshire stock, owing to its diversification and its lower overall risk profile, offers one of the better risk-adjusted return profiles in the financial-services sector (and remains a generally solid candidate for downside protection during market selloffs)," says sector strategist Greggory Warren.

"Second-quarter reported revenue, which includes unrealised and realised gains/losses from Berkshire’s investment portfolios, declined 90.4%," says Warren. However, if you remove the influences that hit the broad index, you get a different story.

"Excluding the impact of investment and derivative gains/losses and other adjustments, second-quarter operating revenue increased 10.2% to $76.2 billion."

Operating earnings came out swinging at Berkshire. Exclusive of the impact of investment and derivative gains/losses, earnings increased 38.8% year on year to $9.3 billion during the June quarter. All of the company's segments [which include energy, utility and railroad businesses] posted solid operating earnings growth, Warren says, adding that Buffett even had insurance on insurance: "Strong results from Berkshire's reinsurance and primary groups overcame another poor quarter from Geico."

There was little in the performance last quarter that would have us change our fair value of Berkshire’s portfolio, especially if much of the losses were from the broad market.

"We continue to be impressed by Berkshire's ability in most years to generate high-single- to double-digit growth in book value per share, comfortably above our estimate of its cost of capital," says Warren. "We view Berkshire's decentralised business model, broad business diversification, high cash-generation capabilities, and unmatched balance sheet strength as true differentiators."

One of the market differentiators at Berkshire comes at a cost, however, as massive cash reserves face record inflation. We estimate that after this recent quarter, the company still has about $70.2 billion in dry powder that could be put to work.

"During the second quarter, the company invested (net of sales) $3.8 billion in equity securities and repurchased just $1.0 billion of its own common stock. Both of these activities were disappointments to us given the selloff in the equity markets during the period," says Warren.

For much of the past decade, Berkshire has struggled to find suitable investments to keep its cash balances from earning a meagre return in a historically low-interest-rate environment, says Warren.

"Meanwhile, several of its larger investments – such as the Kraft Foods merger with Heinz (2014-15), the Precision Castparts acquisition (2015-16) – and taking 10% equity stakes in each of the four major US-based airlines (2016-20) did not live up to expectations," he adds.

While recent changes in book value per share, or Berkshire’s intrinsic value (down 9.1% since March), are concerning, it’s worth keeping in mind that on that metric, the firm beats the S&P 500 TR Index by about 8% annually (compound annual growth rate during 1965-2021).

"Even though Buffett has more recently discouraged investors from focusing on book value per share growth, we still view it as a valuable gauge for assessing changes in intrinsic value," adds Warren, "that is, until such time that Berkshire buys back a ton of its own common stock in a relatively short period of time."

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Andrew Willis  is Senior Editor for Morningstar Canada

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