Apple Is Far Less Important to Berkshire Hathaway Than You Think

The passing of Charlie Munger on Nov. 28 marked the end of a chapter for longtime fans of Berkshire Hathaway (BRK.A -0.64%) (BRK.B -0.81%). Munger often spoke less than Warren Buffett during the company’s famous annual meetings in Omaha, Nebraska. But his wit and wry sense of humor lightened the mood and complemented Buffett’s bouncy cadence perfectly.

Berkshire Hathaway is a behemoth of a company — the seventh-largest-weighted stock in the S&P 500 and the largest non-“tech” U.S.-based stock by market cap (“tech” because Meta Platforms and Alphabet are in the communications sector, while Tesla and Amazon are in the consumer discretionary sector).

At the time of this writing, Berkshire has a market cap of $779.5 billion, but the value of its public equity portfolio is only 46% of that, or $358.1 billion.

Put another way, over half of Berkshire Hathaway’s value derives from private companies or businesses it owns outright. Let’s break down the true composition of Berkshire Hathaway and set up if the blue-chip stock is a buy now.

Image source: Getty Images.

The Big Four

In Berkshire Hathaway’s 2020 annual letter to shareholders, Buffett called Berkshire’s many subsidiaries “a smorgasbord of businesses employing 360,000 at year-end.” The list of companies Berkshire owns part of but doesn’t control is large and diverse. In that same letter, Buffett referred to the company’s four jewels or its “big four.” The big four account for the vast majority of Berkshire’s earnings and its value.

The big four are its stake in Apple (AAPL 0.68%) stock, the company’s property and casualty insurance business, its complete ownership of BNSF railroad, and its 92% ownership of Berkshire Hathaway Energy (BHE).

1. Apple

Berkshire’s stake in Apple has grown since 2020 — thanks in part to Apple stock hovering around an all-time high. Apple makes up 48.4% of Berkshire’s public equity portfolio but only 22.2% of the market cap of Berkshire Hathaway. It’s still a big chunk, but it is smaller than it looks if you’re only focusing on the public equity portfolio.

2. Insurance businesses

Perhaps the most valuable part of Berkshire Hathaway is its property and casualty insurance businesses. Berkshire views its insurance business in two categories: underwriting and investing. Its underwriting operations include GEICO, Berkshire Hathaway Primary Group, and Berkshire Hathaway Reinsurance Group.

Valuing an insurance company isn’t easy. But Buffett has long drawn attention to the float as a good way of monitoring the progress of the company. Float is basically the amount of money an insurance company holds to pay in the event of claims. Float comes from premium payments.

Buffett has long loved the insurance business model because it involves the steady collection of premiums, which can be invested without the cost of capital. In Berkshire’s 2009 shareholder letter, Buffett noted that Berkshire’s float grew from $16 million in 1967 to $62 billion at the end of 2009 (not a typo). In its 2022 annual shareholder letter, Buffett said that the float grew from around $114 billion at the end of 2017 to approximately $164 billion at the end of 2022, helped by Berkshire’s acquisition of Allegheny.

Berkshire books an underwriting profit if premiums exceed the total expenses and eventual losses of the business. However, it is probably going to book an underwriting loss if an unusual amount of catastrophic events occur.

One of Berkshire’s greatest (and perhaps its most underappreciated) strengths is the management of its insurance businesses and its underwriting prowess. According to the 2022 annual report, “insurance underwriting generated an after-tax loss of $90 million in 2022 and after-tax earnings of $728 million in 2021 and $657 million in 2020. Insurance underwriting results included after-tax losses from significant catastrophe events of approximately $2.4 billion in 2022, $2.3 billion in 2021, and $750 million in 2020.” The underwriting success helped protect Berkshire’s insurance float, leaving room to create investment income.

Insurance companies are usually considered to be a good value at a price-to-book ratio of 1 and expensive at a price-to-book ratio closer to 2. Valuing Berkshire’s insurance business on its float alone, which would be very conservative considering these businesses are likely worth far more than that, would make it worth around $162 billion.

3. BNSF Railroad

BNSF is one of the four major U.S. railroads, the others being Union Pacific (UNP 2.71%), CSX (CSX 3.41%), and Norfolk Southern (NSC 3.81%). Each railroad shares a duopoly over a region. For example, BNSF and Union Pacific share the Western hald of the US, while CSX and Norfolk Southern focus east of the Mississippi river.  In 2022, 38% of BNSF’s freight revenue came from consumer products, 23% from industrial products, 23% from agriculture products, and 16% from coal.

In 2022, BNSF booked $5.95 billion in net earnings compared to $5.99 billion in 2021 and $5.16 billion in 2020. Valuing BNSF is tricky, but if we look at the 10-year median price-to-earnings (P/E) ratio of Union Pacific at 19.8 and apply it to BNSF, BSNF would be worth $117.8 billion.

If we applied Norfolk Southern’s 10-year median P/E of 17.96 or CSX’s 10-year median P/E of 16.65, it would be worth around $100 billion or more.

4. BHE

Next, we have a 92% stake in BHE, which could be worth around $90 billion, although estimates vary.

BHE generates, transmits, stores, distributes, and supplies energy, serving 5.2 million retail customers and five U.S. interstate natural gas pipeline companies with over 21,000 miles of pipe. It owns a lot of regional and smaller utilities. But the basic idea is that BHE is a stable cash cow that operates in the midstream part of the integrated oil and gas value chain and the utility sector, which are far different from the exploration and production side of oil and gas.

The not-so-hidden gem

Berkshire generates profits from its manufacturing, service, and retailing business, which booked $12.51 billion in net earnings in 2022, $11.12 billion in 2021, and $8.3 billion in 2020. That makes it a more profitable segment than the insurance businesses, BNSF, or BHE.

Data source: Berkshire Hathaway.

Berkshire Hathaway owns a ton of brands within the manufacturing, service, and retailing space. Notable names include Duracell, Fruit of the Loom, Benjamin Moore, Acme, MiTek, and many more companies.

Valuing Berkshire Hathaway

Berkshire Hathaway is a very complicated business. But it’s easy to see why it is probably undervalued, even though the stock is near an all-time high.

The non-Apple portion of the public equity portfolio is worth $185.75 billion.

Berkshire finished the third quarter of 2023 with cash and equivalents, including short-term investments in U.S. Treasury bills, of $157.2 billion.

Berkshire Hathaway’s equity portfolio, including Apple, is worth $358.12 billion.

There’s another $375 billion in value if we price its insurance businesses at the float of $164 billion, BNSF railroad at $117 billion, and its stake in BHE at $90 billion.

So, right there, we are already at $733 billion. If we assume a 15 P/E on the manufacturing, service, and retailing business and add in the cash position, and Berkshire Hathaway would be worth $1.08 trillion.

Follow what smart minds do

Unlike other conglomerates, Berkshire Hathaway doesn’t pay a dividend. Instead, it believes capital is better spent repurchasing its own stock. And there’s every reason to believe this long-held principle is the right one.

Over the last five years, Berkshire has reduced its outstanding share count by 12% thanks to buybacks. The buybacks boost Berkshire’s earnings per share and make the stock a better value.

Berkshire is a complicated business. But at its core, the value comes from its public equity portfolio, cash, insurance business, BNSF railroad, BHE, and its manufacturing, service, and retailing segment.

Berkshire stock looks cheap even when assigning conservative values to all these moving parts. And for that reason, the blue chip stock is worth buying now.