Berkshire Hathaway Inc. (BRK.B) vs. Fairfax Financial Holdings (FRFHF): Which Stock Should You Add to Your Watchlist This Month?

In this piece, I evaluated two insurance stocks, Berkshire Hathway Inc. (BRK.B) and Fairfax Financial Holdings Ltd. (FRFHF), to identify which is an ideal addition to your watchlist this month. Based on the fundamental comparison of these stocks, I believe FRFHF is the better investment for the reasons explained throughout this article.

The property and casualty (P&C) insurance industry is characterized by steady demand as homes, cars, businesses, and employees must be insured regardless of macroeconomic conditions. Furthermore, the industry is expected to witness innovative changes this year and beyond due to emerging tech and changing market conditions.

Emerging technologies, including AI and automation, would grow increasingly powerful in core tasks within the industry. AI has already shown its potential to boost efficiency and accuracy in several aspects of P&C insurance, from underwriting and risk management to claims management.

For instance, in claims management, AI can be used to analyze photos of losses and weather patterns, identify potential fraud, and streamline workflow processes. Insurers can also use RPA-powered solutions to automate tasks in insurance work, faster claims processing, simplified new business onboarding, easier policy cancellation, and regulatory compliance.

Furthermore, the demand for specialized coverage products has increased considerably, anchored by the changing risk landscape. As the world becomes more interconnected, new threats emerge from cyberattacks, severe weather, record inflation, and emerging industries. Since traditional insurance products can’t simply cover these risks, the gaps in coverage fuel opportunities for specialized products.

According to a report by Mordor Intelligence, the US property and casualty insurance market is expected to register a CAGR of 6% during the forecast period of 2023-2028. Cyber insurance is the fastest-growing line in the United States. A significant increase in net premiums written in the P&C sector should drive the market’s growth.

Meanwhile, the global property and casualty insurance market is projected to reach $2.47 trillion in 2027, growing at a CAGR of 7.6%.

Moreover, insurance companies usually perform well in a rising interest rate environment. As insurers generate revenue by charging premiums, and in exchange, they provide coverage, and the premiums are invested in interest-generating assets, which create higher yields when interest rates increase, insurance providers benefit considerably from higher rates.

This month, the Federal Reserve approved another interest rate hike in its fight against inflation, taking the fed funds rate to a target range of 5.25%-5.5%, the highest level in more than 22 years.

Although inflation has declined for 12 consecutive months, it is still elevated for the Fed, which is looking to wrestle increases down to nearly 2%. Further, Fed Chair Jerome Powell underscored that another rate hike remains on the table if the economy picks up strength and keeps upward pressure on prices.

Thus, insurance stocks BRK.B and FRFHF should benefit considerably from the industry’s solid long-term prospects and high-interest rate environment.

FRFHF is a clear winner in terms of price performance, with 6.8% returns over the past month compared to BRK.B’s 3.3% gain. FRFHF has gained 62.8% over the past nine months, while BRK.B climbed 19.8%. Also, FRFHF’s 50.3% gains over the past year are higher than BRK.B’s 19.1% returns.

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

Recent Financial Results

For the first quarter that ended March 31, 2023, BRK.B’s total revenues increased 20.5% year-over-year to $85.39 billion. The company’s revenues from Insurance and Other segment rose 7.8% from the year-ago value to $63.46 billion. Also, its earnings before income taxes came in at $44.06 billion, an increase of 543.3% year-over-year.

Furthermore, net earnings attributable to BRK.B shareholders increased 536.3% year-over-year to $35.50 billion. Its cash inflow from operating activities was $8.69 billion, up 27.4% year-over-year.

During the first quarter that ended March 31, 2023, FRFHF’s net premiums written increased 6% year-over-year to $5.66 billion, and its net insurance revenue was $5.16 billion, an increase of 10.4% year-over-year. The company’s operating income from its property and casualty insurance and reinsurance operations grew 79.4% from the prior-year period to $1.31 billion.

In addition, FRFHF’s earnings before income taxes increased 95.4% from the year-ago value to $1.77 billion. The company’s net earnings rose 100.9% year-over-year to $1.40 billion, and its EPS came in at $49.38, up 117.8% year-over-year.

Past And Expected Financial Performance

Over the past three years, BRK.B’s revenue and total assets have grown at 7.5% and 9.5% CAGRs. However, the company’s EBITDA has decreased at a 6% CAGR over the same time frame, while its net income and EPS have declined at CAGRs of 10.8% and 7.6%, respectively.

Analysts expect BRK.B’s revenue and EPS for the second quarter (ended June 2023) to increase 5.8% and decline 5.2% year-over-year to $80.58 billion and $3.99, respectively. For the fiscal year 2023 (ending December 2023), the company’s revenue and EPS are expected to grow 5.8% and 15.5% from the previous year to $319.63 billion and $16.15, respectively.

FRFHF’s revenue has grown at a 14.4% CAGR over the past three years. Over the same period, the company’s EBITDA has increased at a CAGR of 74.8%. Also, its total assets have grown at a CAGR of 5.5% over the past three years.

For the fiscal year ending December 2023, analysts expect FRFHF’s revenue and EPS to grow 14.9% and 224.7% year-over-year to $32.24 billion and $141.21, respectively. The company’s revenue for the fiscal year 2024 is expected to increase by 4% year-over-year to $33.53 billion.

Profitability

BRK.B’s trailing-12-month revenue is 11.15 times what FRFHF generates. However, FRFHF is relatively more profitable, with a trailing-12-month gross profit margin and EBIT margin of 38.68% and 6.93% compared to BRK.B’s 3.01% and 3.01%, respectively. FRFHF’s trailing-12-month net income margin of 6.37% is higher than BRK.B’s 2.24%.

Furthermore, FRFHF’s trailing-12-month ROE, ROA, and ROTC of 8.83%, 1.54%, and 3.98% compared with BRK.B’s 1.55%, 0.54%, and 0.93%, respectively. Also, FRFHF’s trailing-12-month levered FCF margin of 13% compared to BRK.B’s negative 3.89%.

Valuation

In terms of trailing-12-month P/E, FRFHF is currently trading at 11.43x, 89.6% lower than BRK.B, which is trading at 110.34x. FRFHF’s trailing-12-month Price/Sales multiple of 0.66 is lower than BRK.B’s 2.48. Likewise, FRFHF’s trailing-12-month EV/EBITDA of 11.38x compared to BRK.B's 37.25x.

Additionally, FRFHF’s trailing-12-month EV/Sales of 0.91x compared to BRK.B’s 2.45.

Thus, FRFHF is relatively more affordable.

POWR Ratings

BRK.B has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, FRFHF has an overall rating of A, which translates to a Strong 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. BRK.B has a C grade for Sentiment, consistent with mixed analyst expectations. In contrast, FRFHF has a B grade for Sentiment, in sync with favorable analyst estimates.

Also, BRK.B has a grade of D for Value, consistent with its higher-than-industry valuation. BRK.B’s forward non-GAAP P/E of 21.79x is 119.3% higher than the industry average of 9.94x. Also, the stock’s forward EV/Sales multiple of 2.42 is 16.2% higher than the 2.89x industry average.

FRFHF, on the other hand, has a grade of B for Value, in sync with a lower valuation relative to its peers. FRFHF’s forward non-GAAP P/E and EV/Sales multiples of 8.80 and 0.80 are favorably lower than the industry averages of 9.94 and 2.89, respectively.

Of the 57 stocks in the B-rated Insurance - Property & Casualty industry, BRK.B is ranked #36, while FRFHF is ranked first.

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

The Winner

Regardless of a challenging macro environment, the insurance industry is well-positioned for robust long-term growth and expansion, driven by stable demand and the growing integration of emerging technologies. The industry could also benefit from the rising interest rate environment. Given the industry tailwinds, insurance stocks BRK.B and FRFHF should grow substantially in the upcoming years.

However, BRK.B’s relatively elevated valuation, low profitability, and weak growth outlook make its competitor FRFHF the better buy 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.

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BRK.B shares fell $2.46 (-0.70%) in premarket trading Wednesday. Year-to-date, BRK.B has gained 14.04%, versus a 20.26% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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