By Andrew Frye and Erik Holm
June 29 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc. will find opportunities to invest its $25.6 billion in cash as insurance units lead a return to profitability, KBW Inc. said as it began coverage of the stock with an “outperform” rating.
Insurance, which generates about half of Berkshire’s profit, stands out as having “attractive long-term growth prospects,” Cliff Gallant, an analyst with KBW, said in a research note today. “The recent global financial turmoil has left Berkshire standing tall as one of the world’s few financially sound institutions.”
Car insurer Geico Corp. and units selling protection against natural disasters are less vulnerable to the recession than most of Berkshire’s businesses, the billionaire chairman and chief executive officer said in May. The company posted its first loss in two decades in the first quarter on the declining value of stock holdings and derivative bets on corporate debt.
Berkshire shares may rise 24 percent to $107,000 from the June 26 close of $86,210, Gallant said. The Omaha, Nebraska- based firm advanced $790 to $87,000 at 10:27 a.m. in New York Stock Exchange composite trading.
Buffett, Berkshire’s chairman, chief executive officer and head of investing, has been buying debt and preferred shares in firms including Goldman Sachs Group Inc., General Electric Co. and Swiss Reinsurance Co. Berkshire doubled its municipal bond holdings in the nine months ended March 31 and scaled back on stock purchases.
“For an astute investor like Mr. Buffett, opportunities abound,” Gallant wrote, citing Berkshire’s $25.6 billion cash hoard. “Berkshire’s financial strength may be unparalleled in the U.S. today and is a key advantage in a credit-conscious world.”
Berkshire’s operating units include manufactured housing builder Clayton Homes Inc., carpet maker Shaw Industries and confectioner See’s Candies. Buffett has purchased the units with cash generated from insurance operations and investment returns, transforming Berkshire from a failing textile maker to a firm with a market value of more than $130 billion.
“What is truly remarkable about Mr. Buffett’s approach has been his ability to successfully execute a multitude of investment approaches,” Gallant said. “He is like a baseball pitcher with five good pitches, and can throw with either hand.”
Equity analysts have given less attention to Berkshire than companies with similar market valuation, in part because of the relatively stable base of shareholders led by Buffett, who owns about a third of the stock. Gallant is the third analyst tracked by Bloomberg to release a report in the last year on Berkshire, which employs about 246,000 people and has a bigger market value than GE. More than a dozen analysts cover GE.
Berkshire, whose Class A shares typically trade less than 2,000 times a day, has slipped 28 percent in the last year, matching the decline in the Standard & Poor’s 500 Index. Fairfield, Connecticut-based GE, which often changes hands more than 50 million times a day, dropped 55 percent in the same period.
Citigroup Inc. has a hold rating on Berkshire, and Edward Jones & Co. advises investors to buy the shares.
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