Barclays analyst Jay Gelb and UBS analyst Brian Meredith chime in on Warren Buffett’s multinational financial giant Berkshire Hathaway Inc. (NYSE:BRK.A) following second-quarter earnings released earlier this month. As Warren Buffett continues to invest in strong consumer brands and lead his company through an industry’s murky waters, both analysts remain bullish on Berkshire’s prospects moving forward.
Berskshire closed second-quarter with operating EPS of $2,803 per share ($1.87 per B share), which rose above Gelb’s projection of $2,757 per A share ($1.84 per B share), but fell below Meredith’s estimate of $2,808 and consensus of $3,097. The results are a reflection of better-than-anticipated earnings in the BNSF and Finance and Financial Products segments.
However, these stellar results are offset by lower-than-expected earnings in Manufacturing, Service and Retail, and Utilities and Energy, which Meredith believes benefited from GEICO’s better-than-anticipated underwriting and higher investment incomes. The 18% year-over-year growth in operating EPS beat Gelb’s estimates. Insurance earnings rose by 36% year-over-year, which Gelb finds consistent with his expectations, including GEICO’s improved year-over-year underlying underwriting results.
Gelb notes Berkshire is on the heels of its largest deal to date, a $32 billion January acquisition of aircraft component manufacturer Precision Castparts.
Gelb reiterates an Overweight rating on BRK.A with a price target of $166, or $249,000 per Class A share, which represents a 12% increase from where the shares last closed. Subsequently, Gelb updates his 2016/2017 EPS estimates from $10,579/$11,319 to $10,633 per A share (adjusted from $7.05/$7.55 to $7.09/$7.55 per B share), commenting, “BRK shares are currently somewhat undervalued in our view.”
From Gelb’s perspective, “Berkshire Hathaway faces ongoing earnings headwinds from its BNSF railway as well as the industrial and manufacturing businesses, but we anticipate a recovery in earnings growth by 2017. On a positive note, the company’s intrinsic value should benefit from substantial acquisitions including Kraft Heinz as well as Precision Castparts (its largest deal ever). Mr. Buffett intends to remain at the helm for around another decade and his succession plan is in place. Berkshire currently has $42bn of immediately deployable cash for acquisitions based on our estimates.”
According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, five-star analyst Jay Gelb is ranked #161 out of 4,121 analysts. Gelb upholds a high 74% success rate and realizes 8.6% in his annual returns. When recommending BRK.A, Gelb earns 3.2% in average profits on the stock.
Both analysts highlight GEICO as a key catalyst factor for Berkshire, with Meredith adding, “GEICO results improve while BNSF continues to face headwinds GEICO’s underwriting results improved in 2Q16 (97.6% CR vs. 99.1% CR in 2Q15) despite $190mm of catastrophe losses from Texas storms as the rate increases from 2015 earn into results. BNSF revenues and earnings declined by double digits as higher stockpiles of coal and low oil prices negatively impacted the shipment of coal and petroleum products. (These trends are unlikely to abate before the end of the year.)”
Continuing the bullish parade on Berkshire, Meredith reiterates a Buy rating on BRK.A as well, while raising the price target from $244,500 to $245,500. Observing encouraging signs from Berkshire within its insurance segment, specifically GEICO, Meredith highlights diversification advantages coupled with a “massive” balance sheet weighing strongly in Buffett’s corporation’s corner.
Meredith believes, “The company’s cash position improved to a record $61.8bn from $53.6bn at the end of 1Q16 due largely to the redemption of Kraft Heinz preferred stock ($8.3bn).”
Meanwhile, TipRanks demonstrates four-star analyst Brian Meredith is ranked #787 out of 4,121 analysts. Meredith carries a high 74% success rate and realizes 6.1% in his yearly returns. When recommending BRK.A, Meredith earns 3.0% in average profits on the stock.
TipRanks analytics exhibit BRK.A as a Buy. Of the analysts polled by TipRanks in the last 3 months, 50% rate a Buy while 50% maintain a Hold. The consensus price target stands at $237,632.50, marking a 7% upside from where the stock is currently trading.
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