At age 87, legendary investor Warren Buffett looks as spry as ever, and his holding company, Berkshire Hathaway Inc. (BRK.A), appears to be in equally robust health, Barron's reports. The corporate tax cuts recently signed into law by President Trump, coupled with gains in Berkshire's equity investments and strong results from its operating divisions, could give Berkshire's book value a 13% boost in the fourth quarter, Barron's estimates. In fact, Berkshire may be the biggest winner overall from the Trump tax cut, per Barron's, quite ironic given that Buffett was one of the president's most vocal critics during the 2016 campaign.
Bright Outlook for 2018
Berkshire's outlook for 2018 is bright, Barron's adds, with a combination of solid economic fundamentals and a reduced federal income tax rate leading them to estimate that 2018 EPS easily will surpass $12,000 per class A share. Given Thursday's close of $299,210 per share, that implies a forward P/E ratio of 24.9. Additionally, Barron's projects that Berkshire's book value per share will end the fourth quarter at about $211,000, giving it a price to book ratio of 1.4.
Berkshire's diverse array of operating divisions include, among others, the Burlington Northern railroad, Lubrizol chemicals, and aircraft parts manufacturer Precision Castparts. Barron's indicates that manufacturing and industrial businesses such as these are likely to benefit from robust economic conditions in 2018. (For more, see also: Is It Time To Break Up Berkshire Hathaway?)
The median price target for Berkshire's class A shares among analysts is $319,340 and the high is $337,331, per The Wall Street Journal, representing increases of 6.7% and 12.7%, respectively, from Thursday's close. Moreover, the consensus EPS estimates are $12,852 for 2018 and $14,177 for 2019, also per the Journal.
From a recent low of 270,250 in midday trading on November 17, Berkshire's shares have risen 10.7%. During the last 10 years, since the close on December 28, 2007, they are up 112%, versus 82% for the S&P 500 Index (SPX).
The recent reduction of the top corporate tax rate from 35% to 21% will slash the deferred tax liabilities on Berkshire's equity investment portfolio by about $27 billion, per Jay Gelb, an insurance analyst at Barclays (BCS), as cited by Barron's. At the end of the third quarter, this portfolio was worth roughly $177 billion and had more than $82 billion of unrealized gains, Barron's says, estimating that both figures have increased by about $10 billion in the fourth quarter. (For more, see also: How Warren Buffett Made Berkshire Hathaway.)
Plentiful Dry Powder
Berkshire is holding cash in excess of $100 billion, which not only adds solidity to its balance sheet, but also gives Buffett ample resources to pursue a major acquisition, Barron's adds. Given Buffett's undiminished investing savvy, this is yet another reason for optimism about the future prospects for Berkshire.