Investors Energized by Berkshire's Alleghany Acquisition

Berkshire stock hits an all-time high

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Mar 21, 2022
Summary
  • Class A shares up 16% this year.
  • The deal is worth $11.6 billion.
  • According to Warren Buffett, "Berkshire will be the perfect permanent home for Alleghany."
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Investors are impressed by Berkshire Hathaway’s (BRK.A, Financial)(BRK.B, Financial) announcement on Monday that it will acquire Alleghany Corp. (Y, Financial) for $848.02 per share in an $11.6 billion blockbuster deal. The offering price is an over 25% premium to Alleghany's closing price last week and a 16% premium to its 52-week high closing price.

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Berkshire Hathaway’s stock had already been displaying solid strength this year, and it appears investors are viewing the details of the all-cash deal positively, as evidenced by the fact the stock hit an all-time high on the announcement after closing above $500,000 for the first time last week.

According to GuruFocus data, the insurance conglomerate's class A shares have risen over 16% year to date.

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“Berkshire will be the perfect permanent home for Alleghany, a company that I have closely observed for 60 years,” Chairman and CEO Warren Buffett (Trades, Portfolio) said in a press release. Alleghany’s finished the trading day at $844.60, a gain of 24.80%, or $167.85. Berkshire Hathaway’s Class A stock closed trading at $525,000, up 2.34%, or $12,009 per share.

Buffett’s Omaha, Nebraska-based conglomerate has topped estimated earnings in three of the last four quarters, according to Zacks.com. The investment research site noted, “The company most recently posted Q4 EPS of $3.27, a +17.2% surprise over the $2.79 consensus estimate. BRK.B has delivered a trailing four-quarter average earnings surprise of +11.86%, helping the stock advance nearly 40% in the past year.”

Alleghany owns operating subsidiaries and manages investments, anchored by a core position in property and casualty reinsurance and insurance. Its shares leaped by more than 25% following the announcement. The transaction is expected to close in the fourth quarter of 2022, subject to customary closing conditions, including approval by Alleghany stockholders and receipt of regulatory approvals.

Buffett communicated to shareholders in his annual letter that he and right-hand man Charlie Munger (Trades, Portfolio) had found "little that excites us" in regard to acquisition targets and warned that low interest rates had inflated the value of public companies. The Financial Times reported that outlook "may have changed in recent weeks as the benchmark S&P 500 has fallen in value, with the shares of roughly a third of the companies in the index now down more than 20% from recent highs.”

As a result of its recent performance, The Financial Times also noted Berkshire's valuation has risen to $770 billion. The S&P 500, by contrast, has fallen 7% so far this year.

According to Simply Wall St., over the last three years Berkshire Hathaway “has grown earnings per share like young bamboo after rain; fast, and from a low base.” It added that the percent growth rate was not “particularly meaningful. Thus, it makes sense to focus on more recent growth rates, instead. Like the last firework on New Year's Eve accelerating into the sky, Berkshire Hathaway's EPS shot from $26,668 to $60,938 over the last year. Year-on-year growth of 129% is certainly a sight to behold.”

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