Berkshire Will Be Hit by Market Selloff, Economic Slowdown but Will Recover in Time

We’ve decreased our fair value estimate for wide-moat Berkshire Hathaway to $535,000 ($357) per Class A (B) Share from $550,000 ($367) after updating our near- to medium-term forecasts for the firm’s various operations and the insurance investment portfolio. Our new fair value estimate is equivalent to 1.57, 1.39, and 1.27 times our estimates for Berkshire’s book value per share at the end of 2022, 2023, and 2024, respectively. For some perspective, during the past 5 (10) years, the shares have traded at an average of 1.40 (1.39) times trailing calendar quarter-end book value per share.

We expect book value growth to be relatively flat this year, as the disruption in the equity and credit markets leads to unrealized losses on the insurance investment portfolio that negates a lot of the positive contributions from increased investment activity, rising interest rates, a hardening market for property and casualty insurance, and other strengths in the company’s operating subsidiaries. Despite our expectations for a mild recession in the near term, we still see Berkshire increasing book value per share at a high-single- to double-digit rate annually during 2023-24, as the insurance investment portfolio recovers and the company reaps the benefits we envision from the Alleghany acquisition—a forecast that assumes a slightly more consistent and profitable insurance and reinsurance operations at Alleghany, a slightly more ambitious Alleghany Capital unit (which has grown through acquisitions during much of the past decade), and an insurance investment portfolio that is more equity heavy than it has been.

As we push past this year’s market selloff and expected recession in the near term, Berkshire’s operating subsidiaries, along with its investment portfolio, should return to more normalized results over the remainder of our five-year forecast period (with the integration of Alleghany providing boost).