Berkshire Hathaway stock has delivered an 81.3% total return over the past 5 years, yet Simply Wall St's Excess Returns intrinsic value estimate and earnings-based multiples both still point to the shares trading at a discount to their assessed worth.

• An 81.3% 5 year return suggests Berkshire Hathaway has already created substantial value for long term holders, so any current discount matters for investors thinking about adding or increasing exposure.
• Berkshire Hathaway's record cash pile and ongoing acquisitions in homebuilding and mobility services can support future cash flow generation. The risk is that deploying such a large cash balance at attractive returns becomes harder as the company scales.
• The company screens as undervalued on 5 out of 6 valuation checks, so the broader assessment leans toward the stock being cheap rather than fairly priced.

The issue now is whether Berkshire Hathaway's current market price offers enough of a discount to the intrinsic value estimate to compensate you for the risks around how that large cash position is put to work.

Is Berkshire Hathaway Still Cheap on Excess Returns?

The Excess Returns model examines how effectively Berkshire Hathaway converts its large equity base into earnings above the cost of that equity. For Berkshire Hathaway, the model assumes stable earnings power of $63,627.66 per share on a book value base of $505,559.42 per share, which implies an average return on equity of 11.75%. With a cost of equity of $39,918.67 per share, that leaves an excess return of $23,709.00 per share, supported by a stable book value estimate of $541,622.96 per share from two analysts.

These inputs translate into an intrinsic value estimate of $1,160,625 per share. This implies the stock is 33.8% undervalued relative to the current market price used in the model. Berkshire Hathaway’s recent buildup of a cash and Treasury position, reported at hundreds of billions of dollars, helps explain why investors may be cautious. At the same time, the model suggests that the earnings power on its equity base supports a higher value than the market price.

On this Excess Returns view, Berkshire Hathaway stock currently screens as undervalued.

Our Excess Returns analysis suggests Berkshire Hathaway is undervalued by 33.8%. Track this in your watchlist or portfolio, or discover 49 more high quality undervalued stocks.

Does Berkshire Hathaway Look Undervalued on Earnings?

The P/E ratio suits Berkshire Hathaway because earnings are a central anchor for how investors tend to think about the conglomerate. On this measure, Berkshire Hathaway trades at about 15.2x earnings. That is very close to the diversified financial industry average of roughly 15.3x, yet meaningfully lower than the peer group average of about 24.0x.

The fair P/E ratio for Berkshire Hathaway is estimated at 17.7x. This is higher than the current multiple and reflects what investors might pay given its size, mix of businesses and risk profile. The gap between the current 15.2x and this fair level indicates the stock trades at a discount on earnings even though the headline multiple sits near the industry average.

Taken together, the P/E comparison indicates Berkshire Hathaway stock appears undervalued on this earnings multiple.

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

Simply Wall St Narratives pick up where the Berkshire Hathaway valuation puzzle leaves off and focus on the assumptions behind the numbers. Each narrative explains what would need to happen to Berkshire Hathaway's growth, margins or earnings for the stock to be worth materially more or less than today’s price, and presents that fair value as a thesis about the business that you can watch play out over time on the Community page.

Here is a chance to add your voice to the Simply Wall St community and set out a number driven case on Berkshire Hathaway's record US$397.4b cash and Treasury position, recent acquisitions and portfolio moves.

Share a narrative on whether Berkshire Hathaway's capital deployment and earnings power justify today's price, and then track how that thesis holds up as new results and deal updates 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

Berkshire Hathaway still screens as undervalued on both the Excess Returns intrinsic value estimate and the earnings multiple view, which are pointing in the same direction. The key question now is whether that discount is justified by the execution risk around putting a very large cash and Treasury position to work. For many investors, the crux is whether Berkshire Hathaway can continue to earn solid returns on that capital without diluting its overall return on equity. That assumption is likely to decide whether today’s apparent discount proves to be an opportunity or a value trap.

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.