Keefe, Bruyette & Woods downgraded Berkshire Hathaway to underperform, warning that Warren Buffett’s succession risk and business-specific headwinds could weigh on the conglomerate’s earnings and stock price next year. The brokerage lowered its rating from neutral to sell and lowered its price target for Berkshire’s Class A shares from $740,000 to $700,000, suggesting a 5% downside from Friday’s closing price of $738,500. “Beyond our continued concerns around macro uncertainty and Berkshire’s historically unique succession risk, we believe the stock will underperform as earnings challenges emerge or persist,” analysts led by Meyer Shields wrote in a note to clients. KBW said its core businesses, from auto insurer Geico to railroad Burlington Northern Santa Fe, are likely to face simultaneous pressures over the next year, reflecting a combination of cyclical and structural challenges across the conglomerate’s portfolio. Analysts said weak insurance investment income, slowing railroad growth and shrinking energy tax credits are adding to the headwinds for Berkshire’s vast business. The Omaha-based conglomerate has underperformed the S&P 500 index this year as its stock price fell double digits from its all-time high after 95-year-old Buffett announced in May that he would step down as CEO at the end of the year after six legendary years. The decline partly reflects the so-called Buffett premium, the extra price investors are willing to pay for the billionaire’s unparalleled track record and superior capital allocation skills. BRK.A YTD Mountain Berkshire Hathaway Berkshire’s succession uncertainty from the beginning of the year to date reflects “Warren Buffett’s perhaps unparalleled reputation and what we see as disappointingly insufficient disclosures that will likely deter investors who can no longer rely on Mr. Buffett’s presence at Berkshire Hathaway,” KBW said in a note titled “A lot is going wrong.” Berkshire’s B shares rose 8.6%. As of Friday, 2024 stocks were up, compared to the S&P 500 index’s 15.5% year-to-date gain. The stock is 6.9 percentage points below the stock benchmark, the largest difference all year. Are we heading in the wrong direction? Berkshire’s operating income for the second quarter fell 4% from a year earlier to $11.16 billion, hit by a decline in underwriting. KBW expects insurance profitability to decline further as Geico lowers personal auto rates and increases marketing spending to regain market share. Berkshire Hathaway Reinsurance Group also faces less favorable conditions, the company said. A mild hurricane season has weighed on real estate catastrophe reinsurance pricing, a trend that could reduce both premium volumes and profitability in coming quarters, KBW said. Investment returns, a key revenue driver in recent years, are expected to slow as well. Lower short-term interest rates are likely to squeeze returns on Berkshire’s large cash and government bond portfolio, limiting the stable revenue stream that has supported its recent performance. Buffett had $344.1 billion in cash, close to an all-time high at the end of June. In the railroad sector, Burlington Northern Santa Fe’s inflation-adjusted earnings have historically moved in tandem with U.S.-China trade activity. KBW warned that sustained tariff pressure and weak trade flows could continue to constrain growth. Berkshire Hathaway Energy could also see its profitability decline as the One Big Beautiful Bill Act accelerates the phaseout of clean energy tax credits, KBW said. The paper said the policy change could reduce profits from future renewable energy projects, putting pressure on the conglomerate’s long-term energy profits. The company is scheduled to announce third-quarter earnings on Saturday morning.
