Berkshire Hathaway's (NYSE:BRK.A) Current P/E Reflects an Unusual Year, Investors May be Overenthusiastic

Berkshire Hathaway's (NYSE:BRK.A) stock is up an impressive 109% over the last five years. On top of that, the share price is up 19% in about a quarter. In a time when markets have been experiencing two years of volatility, it seems that the company's management kept advancing the business and have managed to come out ahead in 2022.

When a company maintains good performance, it draws our attention, and we will review the earnings in this article.

The company is led by Mr. Buffet, Mr. Munger, and their team. In the post 2017 bull market when many tech companies became public via IPO or using SPACs, the old value investing approach pioneered by BRK's team came under pressure from the "this time is different" crowd. While the sentiment lasted a few years, eventually in the summer of 2021 the growth stocks started bursting and BRK maintained a double-digit return for investors.

The company doesn't pay dividends but instead reinvests everything back into the business where it strives to run efficient operations and finds valuable companies to acquire or initiate a position in. On March 21st, the company announced that they are going to acquire Alleghany (NYSE:Y) for an 11.4b cash transaction.

Earnings Review

See our latest analysis for Berkshire Hathaway

One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).

Over half a decade, Berkshire Hathaway managed to grow its earnings per share at 33% a year.

This EPS growth is higher than the 16% average annual increase in the share price. So one could ask if the broader market has become more cautious towards the stock?

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

The reasonably low P/E ratio of 8.62 also suggests market apprehension. However, looking at the chart above, it becomes clear that 2021 has been an unusual year, and analysts are expecting a normalization of earnings. If we use analyst estimates for year 2022, we get a projected net income of US$27.1b, leading to a forward P/E of 28.5 indicating that enthusiasm is actually up, and the price is above the Market P/E of 16.3x.

Conclusion

The company has been a historical performer. With their slow and steady approach, they have managed to ensure both returns and stability for investors. Berkshire Hathaway is continuing its string of acquisitions and is currently adding Alleghany to their portfolio.

Looking at the current earnings performance, we see that 2021 can be argued to be an outlier, and by using forward projected earnings instead we find that the stock is quite ahead of the market's P/E. This could signal investor enthusiasm in the near term, or that shareholders have slightly mispriced the company.

Additionally, take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.

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Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.