UBS says Berkshire Hathaway is still an attractive play after earnings miss, sees 20% gain ahead

Published Mon, Feb 27 20231:34 PM EST

UBS believes Warren Buffett's Berkshire Hathaway remains well positioned to ride out the volatile market even after the conglomerate's latest quarterly earnings missed the Wall Street firm's estimate. "We continue to believe BRK's shares are an attractive play in an uncertain macro environment," Brian Meredith, UBS's Berkshire analyst said in a note Monday. UBS maintained its buy rating on Berkshire and raised its 12-month price target to $556,612 from $542,568. The new forecast represents a 21% upside from the stock's current level around $459,346. Berkshire's operating earnings — which encompass profits made by its assemblage of businesses including Geico insurance, Burlington Northern Santa Fe railroad and a utility, not to mention Dairy Queen and Fruit of the Loom — totaled $6.7 billion last quarter , down 7.9% from a year ago. The conglomerate's operating income of $4,584 per share for Class A shares came in lower than UBS' estimate of $6,252 per share, the bank said. BRK.A 1Y mountain Berkshire Hathaway Still, UBS is bullish on Omaha-based Berkshire for several reasons. Firstly, it expects Berkshire to have higher investment income from higher yields on cash. Berkshire's insurance and other businesses held cash, cash equivalents and U.S. Treasury Bills of $125 billion at the end of 2022, which included some $95 billion in U.S. Treasury Bills. Some of the short-term Treasury bills are now yielding 5% and more. Secondly, UBS believes Berkshire's auto insurer, Geico, will see better underwriting results going forward after a few quarters of losses. Next, Berkshire said over the weekend it increased its ownership in truck stop chain Pilot Travel Centers to 80% from 38.6% for a payment of approximately $8.2 billion. UBS said its new forecast incorporated Pilot as a fully consolidated business in 2023. Finally, UBS said Berkshire shares remain attractively valued, trading at a level where Buffett has historically bought back shares. "We calculate BRK's shares are currently trading at around a 23% [discount] to its intrinsic value, which is in line with the average since BRK resumed share repurchases in 3Q18," Meredith said. Berkshire used $2.855 billion to buy back shares in the fourth quarter, bringing the 2022 total to nearly $8 billion. That marked a slowdown from 2021's record $27 billion as Buffett found several external investment opportunities -- such as Occidental Petroleum and Allegheny Corp. UBS expects Berkshire to repurchase a total of $2 billion worth of shares in the first quarter of 2023.