Berkshire Hathaway stock is being priced at about a one third discount to an intrinsic value estimate from the Excess Returns model, even though the share price has already delivered a 76.7% gain over the past 5 years. For investors, the puzzle is why a company with that track record still looks cheap across several valuation checks.

• Over the past 5 years, Berkshire Hathaway has returned 76.7%, which points to solid long term wealth creation for shareholders who stayed invested through that full period.
• The recent decision to lift its Alphabet holding by roughly US$17b can support expectations for future cash generation, while concentrated exposure to large equity positions may increase the risk that shifts in market sentiment feed through quickly to Berkshire Hathaway’s portfolio value.
• The broader valuation checks lean cheap, with Berkshire Hathaway scoring 5 out of 6 on value and both the Excess Returns intrinsic value estimate and earnings multiples pointing to an undervalued stock.

The issue now is whether Berkshire Hathaway’s current market price already reflects its long term earning power or still leaves a meaningful discount to the intrinsic value estimate.

Scan beyond Berkshire Hathaway and size up other high quality value opportunities with the hand picked 46 high quality undervalued stocks that share a similar profile of strong fundamentals priced at a discount.

Is Berkshire Hathaway Still Cheap on Excess Returns?

The Excess Returns model looks at how efficiently Berkshire Hathaway turns its large equity base into profits above the cost of capital. In this case, the model uses a stable earnings profile instead of rapid growth assumptions.

Berkshire Hathaway is modeled on a Book Value of $522,225.90 per share and a Stable EPS of $65,244.04 per share, based on the median return on equity from the past 5 years. Against a Cost of Equity of $41,143.47 per share, that implies an Excess Return of $24,100.58 per share and an Average Return on Equity of 11.91%. The Stable Book Value is set at $547,710.90 per share using analyst estimates. Together these inputs produce an Excess Returns intrinsic value estimate of $786 per share, which is about 35.9% above the current share price. Berkshire Hathaway’s recent decision to lift its Alphabet stake to a top three holding helps explain why some investors still see more value than the market price implies today.

On this Excess Returns view, Berkshire Hathaway stock appears undervalued relative to its modeled earning power on equity.

Our Excess Returns analysis suggests Berkshire Hathaway is undervalued by 35.9%. Track this in your watchlist or portfolio, or discover 46 more high quality undervalued stocks.

Is Berkshire Hathaway Still Cheap on Earnings?

The P/E ratio is a useful cross check for Berkshire Hathaway because earnings still sit at the center of how most investors value this stock. Berkshire Hathaway trades on a P/E of about 12.6x, which is below both the diversified financial industry average of roughly 17.7x and an estimated peer group average of about 24.0x.

A tailored fair P/E ratio of about 16.6x reflects what investors might expect to pay for Berkshire Hathaway based on its business mix, margins, size and risk profile. The current P/E sits meaningfully under that level, which points to a discount rather than a premium against that benchmark. Put simply, the market is asking investors to pay less for each dollar of Berkshire Hathaway earnings than both the model and typical peers suggest.

On the P/E multiple, Berkshire Hathaway stock appears undervalued relative to what investors might usually pay for its earnings profile.

The Berkshire Hathaway Narrative: What Would Justify Today's Price?

Simply Wall St Narratives pick up where this Berkshire Hathaway valuation puzzle leaves off. They spell out the specific assumptions on growth, margins and earnings that would need to hold for Berkshire Hathaway to be worth materially more or less than today’s price, and they sit on Simply Wall St’s Community page. Each one treats fair value as a thesis about the business that you can track over time, rather than a one off snapshot.

Share a narrative on Berkshire Hathaway in the Simply Wall St community to set out your number-driven view on whether the larger Alphabet position and other portfolio shifts align with the earning power implied by today’s valuation checks. Add your voice now so you can track how that thesis holds up as new results and portfolio moves come through.

Do you think there's more to the story for Berkshire Hathaway? Head over to our Community to see what others are saying!

The Bottom Line

Across both the Excess Returns intrinsic value view and the P/E checks, Berkshire Hathaway still screens as undervalued rather than fully priced. The key question is whether the company can keep turning its large equity base into returns that justify that intrinsic value gap while managing concentrated positions such as Alphabet. If that earning power proves resilient and predictable, the current discount may look appealing. If portfolio or earnings volatility pick up from here, the lower valuation could simply reflect the extra risk that investors are already factoring in.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.