We do not expect to change our fair value estimate for the firm after its acquisition of Dominion Energy's gas operations.
We do not expect to alter our fair value estimate of $342,500 ($228) per Class A (B) share for wide-moat-rated Berkshire Hathaway (BRK.A/)(BRK.B) following news that the firm has agreed to acquire nearly all of wide-moat-rated Dominion Energy's natural gas transmission and storage operations for $4 billion, or $9.7 billion when including assumed debt. Berkshire closed the March quarter with a record $137 billion in cash and cash equivalents and likely has even more cash on hand coming into the current quarter (it's expected to generate more than $20 billion in free cash flow annually the next several years), so this deal represents only a small reduction in its substantial cash hoard, which continues to serve as a drag on overall returns, especially with short-term interest rates dropping to near zero.
That said, we are encouraged to see Berkshire finally putting some capital to work following CEO Warren Buffett's hesitance to jump into the fray following the COVID-19 shutdown. While the deal may not move the needle all that much from a balance sheet perspective, it should produce around $1 billion in net income annually, based on results for Dominion's gas distribution and gas transmission and storage operations the past several years. As we've noted for a number of years, we believe Berkshire's primary area of focus for future deals will be in the utilities and energy parts of its portfolio, an area that Greg Abel (vice chairman in charge of Berkshire's noninsurance business operations and our lead candidate to eventually succeed Buffett) is intimately involved in.
Absent other deals or lucrative internal investments, we still believe the best use of capital for Berkshire in the near term would be repurchasing its own common stock, which continues to trade at around a 20% discount to our fair value estimate and 1.2 times and 1.1 times our projected book value per share for the end of 2020 and 2021, respectively.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Greggory Warren does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.