No. of Recommendations: 4
Berkshire Hathaway Inc
Outlook 2025: Well Positioned for an Uncertain
Environment
Equities
Americas
Insurance, Property & Casualty
Levered to economic growth with hedges if it deteriorates
We believe BRK's shares are a good investment in an uncertain economic environment.
Many of its Manufacturing, Services and Retail businesses, as well as BNSF, are
economically sensitive and should perform well in a good economy. On the other hand,
if the economy deteriorates and/or the market corrects, BRK's Insurance businesses are
defensive, and its substantial cash position gives BRK a lot of firepower for potential
accretive acquisitions and share buyback.
Fundamentals remain good in Insurance with some improvement expected in
Non-Insurance businesses
For its Insurance business, we still expect solid margins at GEICO in 2025 (better then
recent historic averages) with accelerating PIF growth (driven by rate cuts, relaxed
underwriting restrictions, higher ad spend). BH Primary should continue to benefit
from price increases in selected commercial lines, especially E&S where it is a major
player and pricing remains strong. We expect margin improvement and a modest
acceleration in premium growth. We expect BH Reinsurance to have modest premium
growth (5%) and some margin expansion. Property reinsurance will likely remain
competitive, albeit somewhat less than expected prior to the LA Fires, while casualty
reinsurance remains firm. We estimate low single digit revenue growth at BNSF
comprised of 1-2% volume growth and 1-2% increase in revenues per car. We also see a
modest expansion in operating margins. We expect the MSR segment revenue growth
to rebound modestly in 2025 (+3.6% vs. flat in 2024) with modest margin expansion.
Potential upside from deployment of cash
BRK`s cash position was $320b (32% of market cap) at the end of 3Q24. With market
valuations near historical highs (the S&P Industrial index is trading at 23.3x NTM
earnings vs. a 20 year high of 24.6x), a large acquisition seems less likely in 2025, despite
a more accommodative M&A environment in the U.S. under the new administration.
Additionally, with BRK's shares trading near their intrinsic value (we estimate shares are
currently trading at a ~1% premium to intrinsic value, vs their avg. ~16% discount over
the longer term), share repurchases will likely be modest. In the meantime, BRK can
continue to generate attractive mid single digit returns on its cash.
Changing 2025/2026 estimates to reflect LA Fires and higher investment income
We now model $2.5bb of catastrophe losses in 2025, vs $1.4bb in 2024E as we
incorporate the LA Fires loss. Given the size of the insured loss (we are estimating $35bb
for Pacific Palisades and Eaton), we expect a sizeable amount of the loss to be absorbed
be the reinsurance markets; we are forecasting a $1bb insured loss for BH Reinsurance
and a more modest loss for BH Primary ($150mm). Our 2026 EPS estimate rises modestly
on higher forecasted investment income with short term rates expected to be higher for
longer.
