Why Barclays Sees Warren Buffett & Berkshire Hathaway as Huge Tax Reform Winners

Industrials

Published: January 8, 2018 11:40 am

Last Updated: January 12, 2020 4:43 am

Warren Buffett often is considered as one of the best investors of the modern era. After all, he did become the world’s wealthiest man in prior years. And his Berkshire Hathaway Inc. (NYSE: BRK-A) has become one of the world’s most valuable companies. Now it turns out that Berkshire Hathaway will be a big winner under the newly enacted tax reform regime.

A fresh research report from Barclays has raised Berkshire Hathaway’s price target to $357,000 from $322,500. And the “Baby Berkshire,” Berkshire Hathaway Inc. (NYSE: BRK-B), saw its price target rise to $238 from $215 in the Barclays call.

Barclays says it feels that Berkshire Hathaway could see its fourth-quarter book value rise by 12%. That translates into a magic gain of $37 billion, due to its deferred tax liabilities.

This is the year that the nominal corporate tax rate will drop from the prior 35% to 21%. Companies also can begin repatriating overseas cash and will have a territorial tax system that no longer benefits the companies that keep their cash overseas.

What Barclays sees as a huge win is that Berkshire Hathaway investors often value the company against book value rather than against earnings. As a reminder, Buffet has said for years that a simple earnings valuation would not be appropriate because the earnings numbers could be made to look better or worse any year due to the number of ongoing charges and losses or gains that the company carries as unrealized.

And on the overseas front, Barclays noted that Berkshire Hathaway held roughly $12 billion in undistributed foreign earnings as of 2016. The firm feels that Buffett may choose to repatriate some of that cash.

Berkshire Hathaway’s A-shares were last seen up 0.3% at $302,500, within a 52-week trading range of $237,984 to $302,980. The market cap is now within 1% of knocking on the $500 billion market hurdle.

The only five companies currently larger than Berkshire Hathaway are Facebook ($535 billion), Amazon ($583 billion), Microsoft ($672 billion), Alphabet ($758 billion) and Apple ($901 billion).

Buffett has called for tax code changes before, but rather different from what was just passed into law. Yet again, his positions will be on the winning side financially.