Safety In Berkshire – US-FOREX.US
Many might say that the winning bidder who ponied up 1.6 million for a steakhouse lunch with Warren Buffet overpaid. But on Monday, one analyst said that shares of the Oracle of Omaha’s firm are set to swell, even as continued problems wreak havoc on the financial sector.On Monday, Keefe, Bruyette & Woods analyst Cliff Gallant bumped Berkshire Hathaway
to “Outperform” and upped his target price of 107,000 a share for the company, a 20,000 hike from today’s closing price.The endorsement follows a stream of downgrades by the firm of regional banks. KBW knocked CIT Group
to market perform after Q1 losses, downgraded ECB Bancorp
because of its loan losses reserves and thumbed its nose at MetroCorp Bancshares
because of its California market exposure.Berkshire has exposure to hard hit areas of the economy including consumer operations and to credit default swaps. But Gallant argues that Berkshire’s investments in insurance and reinsurance continue to show long-term growth prospects. He also downplayed the company’s first quarter loss saying it was a result of a sagging derivatives market and not indicative of a company that is losing financial strength. “Despite negative marks in its derivatives portfolio, the recent global financial turmoil has left Berkshire standing tall as one of the world’s few financially sound institutions,” the report says.
Gallant says risk in the company’s insurance holdings is low, based on the 51 billion surplus it had at the end of last year which results in a 1 to 2 premium-to-surplus ratio, lower than auto insurers typically maintain , and just about the leverage that catastrophe insurers work with. “In effect,” Gallant says, “Berkshire has twice as much capital as required.”
However, energy legislation such as the cap and trade plan which is currently being debated in Congress poses a risk to the company, Gallant says. Regulation on gas and coal-based power could harm the company’s energy and gas holdings, which include Pacific Corp. and Natural Gas Pipelines. In a nod to 78 year-old Buffet’s propensity to retire, the report also makes that claim that Buffet himself is “irreplaceable” to Berkshire Hathaway. The CEO’s strong presence as a sage investor and guest on television news shows, and perhaps a quiet nod to how he is able to talk up his own book, Gallant wrote Buffet “helps to shape the very world in which he invests.”