UBS cut its price target for the A- and B-shares of Warren Buffett's Berkshire Hathaway (BRK-A, BRK-B) because of COVID-19's impact on the economy, but noted that losses from the virus' impact across its businesses "will be manageable."
Based on a sum-of-the-parts (SOTP) analysis, UBS analyst Brian Meredith trimmed his 12-month price target for Berkshire's A-share price to $358,000, down from $393,000, and B-share price to $239, down from $262. He maintained a buy rating for both stocks. Shares of Berkshire were last trading around $278,000 and $185, respectively, at the time of this writing.
UBS also slightly boosted its first-quarter earnings per share (EPS) estimates to $3,834 for A-shares, up from $3,758, and $2.56 for B-shares, up from $2.51. Berkshire reports earnings on the morning of Saturday, May 2, ahead of its annual meeting, which will be live-streamed exclusively on Yahoo Finance beginning at 4 pm ET.
In addition to its massive stock portfolio, Berkshire Hathaway operates businesses across a variety of sectors, including railways, manufacturing, retail, services, and insurance. In a way, Berkshire Hathaway represents a cross-section of the economy, and different areas will have varying degrees of impact.
Buffett previously warned that “very significant percentage“ of Berkshire’s businesses would be affected by the disruptions caused by the coronavirus pandemic, and so Meredith’s commentary comes as no surprise.
For example, UBS’s Meredith notes that Berkshire's manufacturing, service, and retailing (MSR) businesses "historically been more sensitive to macroeconomic trends and could see growth contract in an economic downturn" and he expects about a 1% decline in revenue for this segment.
Berkshire's MSR business includes the likes of aircraft parts supplier Precision Castparts (PCC), oil additives manufacturer Lubrizol, International Metalworking Companies (IMC), Clayton Homes, and grocery supply chain operator McLane Company, to name a few.
"Given the current conditions in the oil market and lower fuel demand, Lubrizol will likely experience a decline in revenue in 1Q and 2Q; that being said, the additives it produces are derived from oil products, and lower raw material costs could actually benefit operating results. PCC will also likely see a significant slowdown in revenues due to challenges currently being experienced at the airlines and Boeing,” Meredith writes. “Another company in the MSR segment is McLane Company, which operates in the grocery distribution space and could potentially benefit from current conditions as more consumers are eating at home versus dining out.”
The economic environment is also putting pressure on railroad volumes, which impacts Berkshire's BNSF.
"We expect this to continue for as long as "stay at home" orders are in place; however, this could potentially rebound if/when the economy is able to reopen in the second half of the year, and thus we are forecasting 4% revenue growth for BNSF in 3Q and 4Q," Meredith writes, also noting that BNSF could benefit from the lower oil prices.
‘Auto accident frequency declines’
One bright spot that could offset the other areas is insurance. UBS points out that Berkshire-owned GEICO will benefit as COVID-19, and the subsequent shelter-in-place has massively reduced traffic and, therefore auto accidents.
"The pandemic-driven economic shut down in the U.S. should benefit GEICO in the near-term, as miles driven fall sharply and auto accident frequency declines. Historically, there has been a relatively strong relationship between auto accident frequency and miles driven, the latter of which is inversely correlated with unemployment more broadly (and gasoline prices to a lesser extent). There was a material frequency benefit during the last recession and we expect that favorable frequency could be significantly better, reflecting the social distancing protocols that have kept consumers out of stores and off the roads," Meredith writes.
During an interview on March 10, Buffett told Yahoo Finance's editor-in-chief Andy Serwer that the COVID-19 outbreak had caused GEICO to see fewer accidents.
"I can tell you one thing that's kind of interesting. We have seen in the last two weeks, for example, fewer accidents reported," Buffett said at the time, noting that they usually get about 20,000 reports per day.
Buffett added, "So we know when people are driving, yeah, that's the one that's got a lot of reporting being done. And in the last ten days, people just haven't been driving as much. And it's noticeable that — now, you have to make that weather adjusted and all kinds of other things, but people have changed their behavior."
What's more, UBS's Meredith expects the claims from COVID-19 for Berkshire's Reinsurance and Primary insurance business to be "manageable."
Julia La Roche is a Correspondent at Yahoo Finance. Follow her on Twitter.
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April 25, 2020 at 01:46AM
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Berkshire Hathaway price target cut by UBS due to coronavirus impact - Yahoo Money
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