More than 45 years ago, legendary investor Warren Buffett took control of Berkshire Hathaway (BRKBBRKA), a struggling textile company.  Since that time, the corporation exited the weaving and knitting business, and is now one of the largest providers of insurance and reinsurance products in the world.  It also owns and oversees dozens of large and profitable businesses, ranging from electric utilities to ice cream retailer Dairy Queen.  It has more than 250,000 employees and possesses operations around the globe.

Berkshire’s rise to prominence has been impressive, as are the returns shareholders have realized over the past several decades.  Since 1965, when Mr. Buffett and his partner Charles Munger took the reins, the equity, on average, has returned more than 20% compounded annually.  These returns easily trump the performances of the Dow Jones Industrial Average, the S&P 500, and every other commonly-used benchmark.  This level of success, however, has some investors concerned about the future stock returns of the insurance behemoth.  Although the company has, potentially, billions of dollars to spend on improving its existing businesses, as well as on future acquisitions, due to its size and vast profitability, there are few purchases that would be considered “game changers”.  These investors constantly ask the question: At this point, is Berkshire Hathaway stock a good buy?  The answer to that query, in our opinion, is not as simple as yes or no; some analysis is necessary.

First, there are Berkshire’s existing businesses.  It owns several large insurance and reinsurance companies. The most visible and well-known operation is GEICO.  It became a wholly-owned subsidiary in 1996, and at that time, was the sixth largest auto insurer in the U.S. Now, it is third, and offers its products and services in 44 of the 51 American jurisdictions.  GEICO’s market share has increased four-fold over the past 15 years (since Berkshire took full control), and now accounts for more than 8% of the total market.  With the backing of Berkshire, it can, in most cases, offer lower rates than its competition, and with an advertising budget of $800 million in 2009 alone (more than twice the amount spent by any other auto insurer), GEICO will likely continue to expand its business at a healthy rate over the next several years.

Mr. Buffett constantly raves about his insurance businesses, particularly GEICO, and not just because of the cute gecko spokesman.  When Berkshire sells its insurance policies to individuals, businesses, municipalities, and other entities, it receives premiums upfront and pays claims, if necessary, down the road.  Thus, this business allows Berkshire to, at any one time, hold huge sums of money, which is referred to as the float.  Mr. Buffett can then invest the float, which has historically led to handsome profits.  For comparison purposes, Berkshire’s float amounted to $16 million in 1967.  At the end of 2009, Mr. Buffett had $62 billion to invest, and the interest and capital gains he earns, is, for the most part, cost free.  Even better, Berkshire’s float will continue to increase, as GEICO’s, and the company’s other insurance businesses, expand.

In addition to insurance operations, Berkshire owns and controls more than 70 businesses, most notably, railroad giant Burlington Northern Santa Fe and several large electric utilities.  Its more than $55 billion equity portfolio is impressive, as well.  The company owns large chunks of public companies, most notably, blue chips Coca-Cola (KO – Free Coca-Cola Stock Report), Wells Fargo (WFC), and American Express (AXP – Free American Express Stock Report), and dividend income has been impressive.  Revenue from capital gains has been sizable, as well.  All told, for the first nine months of 2010, Berkshire amassed total revenues of more than $100 billion.  Looking ahead, we are optimistic in regard to Berkshire’s numerous holdings, since, in most cases, these businesses hold material market share and possess the financial backing to expand their product lines and market reach.

This brings us to Berkshire’s financial position.  At the end of the September quarter, it possessed about $35 billion in cash and, for a company of its size, a small amount of debt obligations.  This financial flexibility should continue to allow Mr. Buffett to expand current operations, as well as aggressively seek acquisitions.  That said, as mentioned earlier, Berkshire will probably find it difficult to find opportunities that will add significant value to its bottom line.  For instance, the $44 billion purchase of Burlington Northern Santa Fe expanded the company’s noninsurance operations, but currently accounts for a relatively small percentage of Berkshire’s total revenues and profits.  Thus, future purchases will probably help advance the bottom line, but a true “game changer” is unlikely.

As for the stock itself, it is currently trading at around $80 a share, about 6% below its 52-week high.  However, despite the small pullback, this equity, like the overall market, has experienced a good run of late, and has advanced more than 15% over the past six months.  Due to the solid performance, the stock’s price-to-earnings ratio is a bit higher than its historical average and, going forward, we anticipate that its P/E will return to more normal levels.

All things considered, Berkshire Hathaway stock should make for a good long-term holding.  Its current roster of businesses will likely post healthy profit increases in the years ahead, and, with its large cash reserves, Mr. Buffett, as well as his eventual successor (Read more in regard to our take on Mr. Buffet’s succession situation), ought to bolster the company’s stable with additional acquisitions.  Berkshire will continue to benefit from the float and probably sustain substantial dividend income and investment gains from its equity portfolio.  Taking all this into account, we anticipate a solid share-price performance in the years ahead, albeit below the stellar results of the last few decades.  We like these shares for buy-and-hold accounts, but investors should not expect the stock to substantially outperform the broader market averages going forward.

At the time of this article’s writing, the author did not have positions in any of the company’s mentioned.