Is Berkshire Hathaway Still a Compounding Machine at a Discount?

Berkshire Hathaway, the conglomerate synonymous with Warren Buffett's legendary investing acumen, has long been celebrated as a compounding machine. However, as the company navigates a historic leadership transition-Greg Abel set to succeed Buffett as CEO in 2025-investors are scrutinizing whether Berkshire retains its magic amid shifting dynamics. This analysis evaluates Berkshire's valuation metrics and operational trajectory to determine if it remains a compelling long-term investment at a discount.

Valuation Metrics: A Mixed Picture

Berkshire's 2025 valuation metrics suggest a stock trading at a modest premium to intrinsic value. The trailing price-to-earnings (P/E) ratio of 16.03 and forward P/E of 22.92 position the company below its historical average of 18.3% compound annual growth in book value since 1965 according to Morningstar. Meanwhile, the price-to-book (P/B) ratio of 1.54 reflects a stable valuation, hovering near its decade-long range of 0.46 to 1.78 as reported by Macrotrends. This modest premium to book value, combined with a $1.08 trillion market cap, underscores Berkshire's enduring appeal as a diversified holding.

Critically, book value per share has grown at an average annual rate of 12% over the past ten years, though this lags behind its historic 18.3% CAGR. While slower growth may reflect a maturing portfolio and macroeconomic headwinds, a $323.52 book value per share remains a testament to its capital allocation discipline. For value investors, these metrics suggest Berkshire trades at a discount relative to its long-term compounding potential, particularly when compared to the S&P 500's broader valuation multiples.

Leadership Transition: A Double-Edged Sword

The transition to Greg Abel as CEO introduces both opportunities and risks. Buffett's passive, long-term investing philosophy has been a cornerstone of Berkshire's success, but Abel's hands-on operational approach could unlock new efficiencies. According to a Reuters report, Abel is expected to focus on streamlining subsidiaries and enhancing oversight in energy and technology sectors, areas where Berkshire has historically underperformed. This shift could reduce overhead and boost operating margins, potentially driving earnings growth.

However, the market has already priced in uncertainty. Since Buffett's May 2025 announcement, Berkshire's Class B shares have declined over 12% in 2025, underperforming the S&P 500's 7% gain. Analysts attribute this to concerns over the "Buffett premium"-a historical valuation boost tied to his personal brand and investment prowess. While Abel's leadership is unlikely to replicate Buffett's exact formula, his ability to maintain investor confidence and execute strategic acquisitions will be pivotal.

Historical Context: Lessons from the Past

Berkshire's long-term performance under Buffett is unparalleled. From 1965 to 2024, the company delivered a staggering 5,502,284% return, outpacing the S&P 500's 39,054% gain. This was driven by disciplined capital allocation and a diversified portfolio of high-quality businesses. Yet, post-announcement underperformance highlights structural challenges: deploying massive capital reserves in a growth-dominated market and adapting to a post-Buffett era.

Despite these headwinds, Berkshire's core strengths remain intact-its insurance operations, moated businesses like Coca-Cola and See's Candy, and a $140 billion cash reserve. The key question is whether Abel can leverage these assets to sustain compounding without relying on Buffett's brand halo.

Is It Still a Compounding Machine at a Discount?

Berkshire's valuation metrics suggest a stock trading at a reasonable discount to its historical norms. A P/E of 16x aligns with its fair value estimate and offers a margin of safety for long-term investors. However, the leadership transition introduces execution risk. Abel's success will hinge on his ability to balance operational efficiency with Buffett's long-term ethos.

For patient investors, the current valuation-coupled with Berkshire's durable business model-presents an opportunity. The company's book value growth, though slower, remains robust, and its diversified portfolio provides resilience in volatile markets. While the "Buffett premium" may diminish, the underlying fundamentals of compounding remain intact.

Conclusion

Berkshire Hathaway is not the same company it was in 1965, but it remains a compounding machine-just at a different stage of its lifecycle. The leadership transition introduces uncertainty, yet the valuation metrics and operational flexibility suggest a compelling risk-reward profile. For investors with a multi-decade horizon, Berkshire's current discount to intrinsic value, combined with its enduring competitive advantages, warrants serious consideration.