Berkshire Hathaway SWOT Analysis

Berkshire Hathaway SWOT ANALYSIS 2018

INTRODUCTION:

Berkshire Hathaway is a holding company led by Warren Buffet. Also known as Oracle of Omaha, Buffet is famous as one of the most successful investors of all times. His Berkshire Hathaway owns more than 60 companies including Duracell, Dairy Queen and Geico. Berkhsire owns subsidiaries that are engaged in diverse businesses. The largest ones among its subsidiaries are insurance businesses, a freight rail transportation business and a group of utility and energy generation and distribution businesses. Apart from that, the other companies Berkshire owns are engaged in a range of diverse activities. 

Headquarters of Berkshire, Hathaway are in Omaha, Nebraska. The parent company manages its businesses on a decentralized basis mainly which means no central HR, marketing, sales or procurement function. The headquarters maintains a minimal level of involvement in everyday operations of the subsidiaries. However, the senior management is involved in significant capital allocation and investment decisions as well as the selection of CEOs to head each subsidiary. In the recent years, Berkshire has enjoyed immense financial growth. This is a SWOT analysis of Berkshire Hathaway, discussing its significant strengths, weaknesses, opportunities and threats.

STRENGTHS:

Attractive investment :-

Warren Buffet is known for his smart investment choices. Throughout the industry, investors like to follow his investment decisions. The recent fast growth in the net revenue of Berkshire is also a result of the Chairman’s financial acumen. Buffett has bought a large and significant stake in Apple too. Apple company’s shares took a major jump in 2018 leaving  Buffett richer by Billions. Berkshire has continued to increase its investment in Apple. As per a ‘Market Watch’ report, Berkshire owned 239.6 million shares in Apple by the end of March. Berkshire’s total stake in Apple is worth 48 Billion dollars now. Several other investments made by Berkshire have also produced impressive results including that in Coca Cola. Some other major investments by Berkshire include those in American Express, Delta Airlines, Bank of  America, Wells Fargo, General Motors & Phillips 66.

More about Berkshire’s common stock investments that had the highest market value at year end fiscal 2017 in the table below.

Berkshire's 15 common stock investments with largest market value at year end 2017.

Shares*CompanyPercentage of Company OwnedCost** (millions)Market Value (millions)
151,610,700American Express Company17.6$1,287$15,056
166,713,209Apple Inc.3.320,96128,213
700,000,000Bank of America Corporation6.85,00720,664
53,307,534The Bank of New York Mellon Corporation5.32,2302,871
225,000,000BYD Company Ltd.8.22321,961
6,789,054Charter Communications, Inc.2.81,2102,281
400,000,000The Coca-Cola Company9.41,29918,352
53,110,395Delta Airlines Inc.7.42,2192,974
44,527,147General Motors Company3.21,3431,825
11,390,582The Goldman Sachs Group, Inc.36542,902
24,669,778Moody’s Corporation12.92483,642
74,587,892Phillips 6614.95,8417,545
47,659,456Southwest Airlines Co.8.11,9973,119
103,855,045U.S. Bancorp6.33,3435,565
482,544,468Wells Fargo & Company9.911,83729,276
Others14,96824,294
Total Common Stocks Carried at Market$74,676$170,540
**********

Strong financial growth :-

Net Revenue and Net earnings of Berkshire have grown fast in last five years. The brand has enjoyed strong and profitable growth between 2013 and 2017. Net revenue of Berkshire grew by around 60 Billion in these five years. Net income on the other hand more than doubled from 2013 to 2017. Net revenue of the brand stood at 182.4 Billion dollars in 2013 and rose past 242 Billion dollars in 2017. Net earnings were only around 19 billion in 2013 which rose to 44 billion dollars in 2017. Net revenue of the brand grew driven by strong growth in insurance premiums.

Large and varied business portfolio :-

Berkshire is a holding company and principally an investor but the brand also owns several companies. As already stated in the introduction, it owns more than 60 companies including Geico, Dairy Queen and Duracell.  The largest ones among its subsidiaries are insurance businesses, a freight rail transportation business and a group of utility and energy generation and distribution businesses. However, the entire business portfolio of the brand is larger and much diverse.

Major acquisitions :-

Acquisitions are among the most important building blocks of Berkshire’s business. Apart from sizeable stand alone acquisitions, the brand also makes bolt acquisitions that fit well with the businesses it owns. Berkshire has grown through these acquisitions. Last year, it made one sizeable stand alone acquisition. It purchased a 38.6% partnership interest in Pilot Flying J (“PFJ”). With about $20 billion in annual volume, PFJ is the nation’s leading travel-center operator. Apart from it, the subsidiaries Berkshire owns have also made several bolt on acquisitions which add value to its existing businesses.

WEAKNESSES:

Decision making limited to few individuals :-

Warren Buffett is the main decision maker at Berkshire Hathaway. Apart from that most decision making is limited to very few individuals at Berkshire. While it reduces the chances of error on the one hand, on the other it can have some disadvantages. Buffett himself regrets a few decisions he made in his life where he did not listen to his important advisors. These investment choices did not yield the right results or Berkshire would have been even richer.

Acquisition and investment mistakes :-

Warren Buffett has been able to make several major and important acquisitions. However, not all of the acquisitions he made were as successful. Some of them missed and several backfired as well. Right from the purchase of Berkshire Hathaway textile company to Tesco, Dexter shoe, Waumbec textile, and some others, Warren Buffett regrets his purchase of or over-investment in these stocks.  Apart from that he also missed several important investment opportunities including Google and Amazon.

OPPORTUNITIES:

New Acquisitions :-

Acquisitions are an important part of Berkshire’s business model and strategy. The brand has grown through acquisitions and will continue to grow through more. Berkshire must acquire new businesses selectively in order to grow faster and acquire ones that strengthen its existing business model. This will help it retain its profitable momentum.

Investment in emerging economies :-

Berkshire should keep an eye on investment opportunities in the emerging economies to find faster growth. The emerging Asian economies offer new opportunities of profitable growth and can be sound for investment. These economies are growing at a fast rate and investing in them could bring attractive returns in near future.

Investing in technology brands:

Technology is right now the hottest industry. Apart from Apple, Berkshire has invested in very few technology labels. While playing cautiously is a good financial strategy but sometimes you resent being overcautious. Buffett himself resents not having invested in  Google and Amazon at an early stage. Had he done so he would have been several billions richer. These technology brands have grown faster than expectations. Investing in new technology brands too could generate attractive returns in the longer run.

THREATS:

Regulatory threats :-

In US as well as abroad, the regulatory framework has changed a lot in response to the economic and financial crisis and other issues. Regulation of the financial institutions has also increased a lot leading to higher compliance and operational costs as well as heightened overall pressure. These things can impact revenue and net earnings of not just the insurance business of Berkshire but the other businesses too.

Competition :-

Competition and technology can also erode Berkshire’s franchises and result in lower earnings. Each of its businesses is operating in an intensely competitive  environment. Changes in the market and technological environment can also lead to weakening of the brand’s competitive advantage. They can have a direct impact on its earnings.

Economic fluctuations:

Deterioration in the general economic environment can significantly reduce the operating earnings of Berkshire and impair its ability to access capital markets at reasonable costs. Economic deteriorations for prolonged periods can materially harm Berkshire’s most significant businesses which are subject to normal economic cycles.

Traditional risks related to insurance and investment businesses :-

There are several kinds of risks associated with any financial business including insurance and investment. Many of them are inherent to the insurance business.  Berkshire’s tolerance for risks may result in significant underwriting losses in its insurance business. Same losses can result from degree of estimation error inherent in the process of estimating property and casualty insurance loss reserves.

CONCLUSION:-

Berkshire Hathaway has enjoyed fast financial growth driven by growth in insurance premiums over the past five years. Apart from attractive investment which has grown fast left Warren Buffett richer by several billions, Berkshire has grown through acquisitions, both stand alone and jolt on. Moreover, the large and varied business portfolio is also a  significant strength for the business. However, Warren Buffett has also made several investment errors in his life which he regrets. He also missed several important investment opportunities like Amazon and Google. To grow faster Berkshire must consider investing in technological brands. The emerging Asian economies also offer significant investment and growth opportunities that  the brand can exploit. This will bring both faster growth and higher stability. Otherwise, Berkshire is in a strong financial position and has more than sufficient cash reserve. Warren Buffet is worried that with his more than 116 Billion dollars cash reserve, he is unable to find the right big brands to acquire.

Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.