We are upgrading our recommendation on Berkshire Hathaway B-shares (BRK.B) to Outperform from Neutral following the strong second-quarter results. The quarter reflected strong performances across all business segments: Insurance, Railroad, Utilities and Energy, Manufacturing, Service and retailing as well as Finance and Financial products.
Though the company has witnessed fluctuating earnings between the quarters due to heavy exposure to stock option derivatives, most of these gains/losses are unrealized. Moreover, we expect its Finance and Financial products segment to continue improving, given the gradually recovering economy.
A solid balance sheet, adequate liquidity and continuing trend of growing book value are the other positives. Though a lack of clarity regarding CEO Warren Buffet's succession prevails, our six-month target price of $106.00 per share equates to about 18.7X our earnings estimate for 2012. This target price implies an expected total return of 20.0% over that period.