The Berkshire Success Recipe: Concentrated Portfolio With Diversified Operations

Berkshire’s Cash Hedge Enables Flexibility In the Years Ahead

• BRK’s revenue has been relatively flat since Q2 with growth in the bottom-line.
• The company posted TTM net income close to $68B, however I expect some downward pressures ahead, leading to an average net income of $66B by 2029.
• BRK is taking a contrarian position from the tech-long market and is increasing its cash hedge.
• The company’s ample liquidity balance will allow it to have flexibility in deploying or protecting capital come 2025.
• I’m maintaining my 2029 forward estimate of $1.11T, and $830B present value.

Berkshire posted flat revenues in Q3 at $93B, however, the bottom-line was positive with $26.3B, up from a loss YoY. Likewise, BRK’s TTM revenue and net income were $369.9B and $67.86B, up 5.9% and 39% respectively. 

The company’s revenues are currently stagnating and behind my 3.6% CAGR estimate. However, it has been only a short while since I published my narrative, and it is too early to reassess based on performance alone. I maintain that the company is capable of reaching my 2029 target revenue of $442B.

I expect cyclicality on the bottom-line and hold my expected average net income target of $66B. The cyclicality assumption is also shared by analysts, who expect an average net income of $49B by FY’25, and $30B by FY’26. These expectations seem to factor-in weakness in the insurance business driven by an economic downturn after 2025. In my view, the company will likely surprise on the upside, as management has been preparing in anticipation of negative scenarios.

Reinforcing The Balance Sheet With $325B In Liquidity

BRK’s cash portfolio has almost doubled since last year, and is now at $325B, up 94% from $167.6B YoY. This number slightly underestimates the increase in fixed-income investments, as the cash flow statement (p. 7) reveals that BRK purchased $354.5B worth of new fixed-income securities on net.

The short-term investments balance is now $288B, and given that 3-month treasuries have yielded between 5.1% and 5.4% in Q3, the company will make around $3.8B after expiration. A welcome addition to the $26.3B Q3 net income. In-fact, BRK’s total quarterly income from interest, dividends and investments is $5,9B, up from $4B YoY.

BRK increased the diversification of its equity portfolio, as 70% of its aggregate value is now held in 5 companies, vs 78% one year ago. The top 5 companies’ in BRK’s equity portfolio are: AXP, AAPL, BAC, KO, CVX. The company’s management continues to reduce its reliance on equity positions and cycling into safer fixed-income assets.

Valuation Implications

Berkshire is continuing to perform while increasing its cash pile that can be used to hedge a downturn in the economy or be deployed to new investments. In my view, the company is moving in the right direction, even if that is slightly more contrarian than the general long disposition in the market, especially the technology segment.

By retaining my 16.7x PE estimate for 2029, I continue to estimate a $1.11T forward value for Berkshire. Discounted back at a 5.5% rate, the present value stands at $830B, resulting in a per-share value of $605K for Class A / $403 for Class B shares. 

Note that the per-share calculation assumes a reduction in total share counts by 4.6% in 2029 due to buybacks.