Is Berkshire Hathaway a Smart Buy, Even Without Warren Buffett?

At Berkshire Hathaway's (NYSE: BRK.A)(NYSE: BRK.B) recent annual meeting, CEO Warren Buffett shocked investors by announcing his intention to step down from the helm at the end of 2025. As you might expect, the stock initially reacted negatively and remains about 4% below its closing price before the meeting, despite generally strong overall stock market performance.

So is Berkshire Hathaway still a smart stock to buy, even without Buffett calling the shots?

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The short answer is yes. I still think Berkshire is a compelling investment now that we know Buffett is leaving. And there are two main reasons why.

Image source: The Motley Fool.

Not much is really changing with the business

Of course, it's a big deal that the legendary investor is stepping down from his role as CEO. But as far as the day-to-day leadership goes, not a whole lot is changing. Ajit Jain will still oversee Berkshire's insurance operations, Greg Abel already supervises non-insurance operations at Berkshire, and all of Berkshire's individual subsidiary businesses have their own leadership. In fact, having a great management team in place is a requirement before Buffett is interested in an acquisition.

Then there's the stock portfolio. Investment managers Ted Weschler and Todd Combs have been handling an increasing amount of Berkshire's capital for years, currently running about 10% of its portfolio. And while it's unclear who will have ultimate control over the stock portfolio when Buffett leaves, all have established excellent track records when it comes to capital allocation.

Finally, while Abel will have control over Berkshire's $348 billion cash stockpile, he has already shown that he generally follows Buffett's playbook when it comes to deploying capital, or choosing not to. His handling of utility acquisitions earlier in his career are a great example.

In a nutshell, Buffett has done a great job of putting all the right pieces in place to ensure Berkshire's success long after his tenure is over.

It's a good value

At its current valuation of about $1.11 trillion, Berkshire Hathaway is roughly 5% below its all-time high and might sound expensive at first. But I'd argue the exact opposite, and here's why.

There are three main parts of Berkshire:

• Its subsidiaries, or operating businesses.
• Its stock portfolio.
• Its cash and short-term investments.

Fortunately, the latter two are easy to value. Berkshire has roughly $348 billion in cash on its balance sheet, and the company's stock portfolio has a market value of $288 billion. If we subtract these two amounts from Berkshire's market cap, we see that the market is valuing Berkshire's collection of operating businesses at $474 billion.

Now, let's look at Berkshire's operating earnings over the past four quarters, excluding investment income -- mainly the interest earned on its cash.

Data sources: Berkshire Hathaway earnings reports, author's own calculations. Note that the main reason for the variance between quarters is underwriting profitability from the insurance business.

So if we divide the "market value" of Berkshire's operating business by this earnings figure, we see that the market is valuing the businesses themselves at just 14.4 times earnings. That's not at all an expensive price to pay for a collection of largely recession-resistant businesses with steady cash flow.

The bottom line

Of course, Berkshire Hathaway is not going to deliver the 5.5 million-percent return it has produced from 1964 through 2024 during the Abel era. As Buffett himself has conceded, the numbers have simply become too large for annualized returns in the 20% range to continue indefinitely.

However, Berkshire has become exactly the type of investment Buffett typically looks for: a wonderful business at a fair price. I don't exactly think Berkshire will be the best performing stock in my portfolio over the next decade or two, but I do think it will marginally outperform the S&P 500 over time, and with somewhat lower volatility. I plan to incrementally add to my position throughout the rest of 2025, especially if we see any opportunistic weakness in the stock price.

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Matt Frankel has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.