Is Loews Corp. (L) a Better Buy Than Berkshire Hathaway (BRK.B)?

As interest rates surge, insurance companies often take advantage of this uptrend. With the Federal Reserve's assertive stance on curbing inflation, the probability of reducing interest rates appears minimal this year.

In this article, I have analyzed two insurance stocks, Berkshire Hathaway Inc. (BRK.B) and Loews Corporation (L), to ascertain a better portfolio addition. Based on the fundamental comparison of these stocks, L presents a better investment opportunity for the reasons explained throughout this article.

To rein in the stubbornly high inflation, the Fed’s recent interest rate hike has taken the Fed funds rate to a target range of 5.25%-5.5%, marking the highest level over two decades.

Inflation persists above the Fed's 2% threshold despite a notable decline. However, on the back of increasing wages and strong retail sales data, the likelihood of rate reductions appears slim this year.

Insurance companies, a crucial component of the economy, often thrive amid elevating interest rates. Insurers profit from premiums in exchange for coverage, with the collected premiums invested into assets that generate interest. This creates higher yields when interest rates rise, and insurance providers benefit considerably from higher rates.

As per Swiss Re, the stability of the insurance sector will showcase immense resilience over the next couple of years. Global insurance premiums are predicted to grow at 1.1% and 1.7% throughout 2023 and 2024, respectively.

In a 2022 report by Allianz Trade, the Property & Casualty (P&C) sector witnessed a robust growth rate of 8.7%. Notably, of the global increase, over €77.5 billion ($84.61 billion) originated solely from North America.

The ever-increasing adoption of digital solutions is further contributing to the industry's expansion. As consumers gravitate toward digital channels for purchasing and managing insurance, P&C insurers are compelled to bolster their capabilities in digital technologies, automation, artificial intelligence, and advanced analytics. McKinsey predicts that by 2030, up to 50% of routine claims will be processed digitally.

The global P&C insurance market is expected to reach $2.47 trillion in 2027, growing at a CAGR of 7.6%.

In terms of price performance, L has gained 6.6% over the past year, whereas BRK.B has returned 17.1%. However, L gained 4.9% over the past month to close the last trading session at $62.35, while BRK.B has returned 3.9% to close the last trading session at $354.50.

Here are the reasons why we think L could perform better in the near term:

Recent Developments

L repurchased 1.8 million shares of its common stock for $107 million and bought an additional 0.6 million shares for $37 million in the third quarter.

Recently, L announced its quarterly dividend of $0.0625 per share of common stock, payable to shareholders on August 29. Its annual dividend of $0.25 per share translates to a dividend yield of 0.40%. Its four-year average dividend yield is 0.51%. The company has paid dividends for 33 consecutive years.

BRK.B used approximately $1.4 billion to repurchase its shares during the second quarter of 2023. This brings the six-month total to $5.8 billion. Moreover, as of June 30, 2023, BRK.B’s insurance float was approximately $166 billion, an increase of approximately $2 billion from the end of 2022.

PacifiCorp, a regulated electric utility in Oregon and other Western states, is a wholly owned subsidiary of Berkshire’s 92% owned subsidiary, Berkshire Hathaway Energy Company (BHE).

The verdict in the devastating Oregon wildfires case came against PacifiCorp, liable to pay punitive damages for four major wildfires that devastated the state in 2020. Faulted for negligence, the utility is bound to pay over $73 million in compensatory damages to 17 affected property owners who suffered losses due to these severe events.

Recent Financial Results

For the fiscal second quarter that ended June 30, 2023, BRK.B’s total revenues increased 21.4% year-over-year to $92.50 billion. The company’s Insurance and Other segment revenues rose 4.1% from the year-ago value to $65.61 billion. Net earnings attributable to BRK.B shareholders stood at $35.91 billion, compared to a net loss of $43.62 billion in the year-ago quarter.

However, its total cost and expense for the quarter grew 24.5% year-over-year to $80.64 billion. Net cash used in financing activities stood at $9.63 billion for the six months that ended June 30, 2023, compared to net cash flow from operating activities of $1.61 billion in the year-ago period. As of June 30, 2023, the company’s total liabilities stood at $489.81 million, compared to $466.78 million as of December 31, 2022.

For the fiscal second quarter that ended June 30, 2023, L’s total revenues increased 16.1% year-over-year to $3.93 billion. Its adjusted EBITDA stood at $100 million. Net income attributable to L and net income per share increased 115.6% and 132.4% year-over-year to $360 million and $1.58, respectively.

For the six months ended June 30, 2023, the company’s net cash flow provided by operating activities stood at $2.15 billion, up 48.9% from the year-ago value. Moreover, its retained earnings came in at $15.64 billion as of June 30, 2023, compared to $14.93 billion as of December 31, 2022.

Past Financial Performance

Over the past three years, BRK.B’s revenue and EBITDA have grown at 10.3% and 9.7% CAGRs, while L’s revenue and EBITDA grew at 4.9% and 65.8% over the same period.

Profitability

L’s trailing-12-month gross profit margin and ROTA are 34.47% and 1.73% compared to BRK.B’s 33.1% and 0.54%, respectively. Also, L’s trailing-12-month revenue per employee of $1.17 million is compared to BRK.B’s $788.74 thousand.

Thus, L is more profitable.

Valuation

L’s trailing-12-month Price/Sales of 0.98x is 58.5% lower than BRK.B’s 2.36x. Also, its trailing-12-month EV/Sales of 1.57x is 31.4% lower than BRK.B’s 2.29x.

POWR Ratings

BRK.B has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings. Conversely, L has an overall rating of B, which translates to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. L’s C grade for Value is in sync with its trailing-12-month P/E of 11.64x, which is 20.3% higher than the industry average of 9.68x and trailing-12-month Price/Book multiple of 0.97, which is 8.21% lower than the industry average of 1.05.

BRK.B has a Value grade of D, consistent with its higher-than-industry valuation. BRK.B’s trailing-12-month Price/Cash Flow of 18.12x is 165.9% higher than the industry average of 6.82x. Also, the stock’s trailing-12-month Price/Book multiple of 1.44 is 37.2% higher than the 1.05 industry average.

L’s B grade for Growth is justified by its robust financial performance in the last reported quarter. Conversely, BRK.B has a C grade for Growth, evident from its mixed financial performance in the previous quarter.

Within the B-rated Insurance - Property & Casualty industry, BRK.B is ranked #21, while L is ranked #4 out of the 57 stocks.

Beyond what we’ve stated above, we have also rated both stocks for Momentum, Stability, Sentiment, and Quality. Click here to view L ratings. Get all BRK.B ratings here.

The Winner

The insurance sector stands on solid footing for enduring growth and expansion, underpinned by steady demand and the burgeoning incorporation of cutting-edge technologies. Additionally, an escalating interest rate environment could provide further advantages to the industry. The industry tailwinds propel enticing prospects for industry players L and BRK.B, both of which are strategically poised to reap benefits from the ongoing expansion.

However, given L’s consistent dividend disbursements, strong profitability, and comparatively inexpensive valuation, it could be a better choice now.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Insurance – Property & Casualty here.

What To Do Next?

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BRK.B shares were trading at $358.25 per share on Wednesday morning, up $3.75 (+1.06%). Year-to-date, BRK.B has gained 15.98%, versus a 16.92% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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