Heather Struck, 06.30.09, 12:31 PM EDT
As regional banks falter, turn to Warren Buffett's stalwart conglomerate for financial stock exposure.Many might say that the winning bidder who ponied up $1.6 million for a steakhouse lunch with Warren Buffett in an eBay auction this week 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 ( BRK - news - people ) to outperform and upped his target price to $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 ( CIT - news - people ) to market perform after Q1 losses, downgraded ECB Bancorp ( ECBE - news - people ) because of its loan losses reserves and thumbed its nose at MetroCorp Bancshares ( MCBI - news - people ) 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 (2 to 1), 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 that 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 the question of the 78-year-old Buffett's eventual retirement, the report also makes that claim that Buffett himself is "irreplaceable" to Berkshire Hathaway. Referring to the CEO's strong presence as a sage investor and guest on television news shows, and perhaps in 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."Related Links
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