After Earnings, is Berkshire Hathaway Stock a Buy?

What
We
Thought
of
Berkshire
Hathaway’s
Q2
Earnings

•

Overall
Results: Operating
earnings,
exclusive
of
investment
gains/losses,
increased
15.5%
year
over
year
to
$11.6
billion
during
the
June
quarter
and
26.0%
to
$22.8
billion
over
the
first
half
of
the
year.
Strong
insurance
results
continued
to
compensate
for
weakness
in
other
segments.
Berkshire’s
insurance
operations
–
which
account
for
more
than
a
third
of
its
earnings
on
average
and
half
of
our
valuation
–
continued
to
post
solid
premium
growth
owing
to
better
pricing
in
most
business
lines,
as
well
as
outstanding
operating
profitability
due
to
better
pricing,
lower
claims
costs,
and
a
dearth
of
major
catastrophe
losses.
Investment
income
provided
an
added
boost,
given
all
the
cash
Berkshire
has
invested
in
T-bills.

•

Railway
and
Energy
Units
Dampen
Earnings: BNSF
Railway
and
Berkshire
Hathaway
Energy
continue
to
weigh
on
results.
BNSF
has
maintained
its
practice
of
sacrificing
more
in
pricing
than
its
closest
competitor,
Union
Pacific,
to
secure
solid
volume
growth,
which
has
hurt
profit
margins.
Normally
a
pillar
of
stability,
BHE
reported
revenue
of
$2.2
billion
during
the
first
half
of
2023
and
2024,
well
off
the
$2.9
billion
in
2021-22.

BHE
has
also
seen
earnings
impacted
the
past
two
years
by
loss
accruals
for
litigation
arising
from
wildfires
in
California
in
2020
and
Oregon
in
2022.
Homeservices
of
America
has
been
negatively
affected
by
the
rapid
rise
in
interest
rates
over
the
past
couple
of
years.
While
we
view
these
as
blips
in
BHE’s
overall
results,
it
has
been
frustrating
to
see
one
of
the
firm’s
more
stable
businesses
upended
by
events
mostly
outside
its
control.

•

Insurance
Investment
Portfolio
Generating
More
Income
as
Mix
Shifts: As
Warren
Buffett
has
put
more
capital
into
Treasury
bills
and
reduced
Berkshire’s
exposure
to
low-dividend-yielding
stocks,
its
insurance
investment
portfolio
has
seen
a
large
uptick
in
investment
income,
rising
from
$1.4
billion
in
the
fourth
quarter
of
2021
to
$6.9
billion
in
the
second
quarter
of
2024.
It
will
likely
remain
at
that
level,
given
Berkshire’s
commitment
of
another
$80
billion
to
T-bills
during
the
second
quarter.
This
rise,
along
with
the
uptick
in
stock
sales
this
past
year,
is
all
realized
tangible
income
and
won’t
be
impacted
by
future
volatility
in
the
equity
markets.

•

Berkshire
Continues
to
be
a
Net
Seller
of
Equities: After
trimming
its
stake
in
Apple (AAPL) by
about
13%
in
the
first
quarter
of
2024,
Berkshire
cut
its
stake
50%
in
the
second
quarter,
noting
in
its
quarterly
report
that
its
Apple
stake
was
worth
$84.2
billion
(equivalent
to
399.8
million
shares)
at
the
end
of
June,
compared
with
$135.4
billion
(789.4
million
shares)
at
the
end
of
March.
It
sold
off
Paramount
Global (PARA) and
trimmed
its
stakes
in
Chevron (CVX),
Louisiana-Pacific (LPX),
and
Sirius
XM
Holdings (SIRI) in
the
first
quarter.
The
firm
also
reduced
its
Bank
of
America (BAC) shares
this
past
month,
selling
more
than
90.4
million
shares
for
proceeds
of
$3.8
billion.
That
said,
Berkshire
retains
meaningful
stakes
in
Apple
and
Bank
of
America
despite
the
cuts
to
its
holdings.

•

Cash
Pile
Rises
to
a
Record
$277
Billion:
Going
into
Berkshire’s
annual
meeting,
we
noted
that
Buffett
somewhat
painted
the
firm
into
a
corner
by
commenting
in
May
2017
(when
the
company
had
$96.5
billion
in
cash
and
cash
equivalents
on
hand)
that
it
would
be
difficult
to
defend
holding
$150
billion
or
more
three
years
hence.

For
most
of
the
past
seven
calendar
years,
he
kept
cash
balances
below
that
threshold,
but
that
dam
broke
in
the
third
quarter
of
2023,
and
it
posted
a
balance
of
$276.9
billion
for
this
quarter.
Buffett
doesn’t
talk
about
that
threshold
anymore.
We’re
surprisingly
less
concerned
with
the
issue
than
we
usually
are,
primarily
because
short-term
rates
are
still
above
5%
and
Berkshire
had
$234.6
billion
invested
in
T-bills
at
the
end
of
June
2024.

Fair
Value
Estimate
for
Berkshire
Hathaway

With
a
3-star
rating,
Berkshire
Hathaway
stock
is
fairly
valued
compared
with
our
fair
value
estimate.

Our
fair
value
estimate
for
Berkshire
remains
at
$640,000
per
Class
A
share
and
$427
per
Class
B
share,
equivalent
to
1.45
times
our
estimates
for
its
book
value
per
share
at
the
end
of
2024
and
1.35
times
our
estimate
for
2025.
For
perspective,
over
the
past
five
years,
the
shares
have
traded
at
an
average
of
1.43
times
the
trailing
calendar
year-end
book
value
per
share,
and
1.44
times
over
the
past
10
years.

While
Berkshire
is
generally
viewed
as
a
defensive
stock,
rising
when
the
equity
markets
are
in
the
tank
and
struggling
to
keep
pace
with
the
S&P
500
Index
when
market
returns
exceed
10%,
so
it
was
interesting
to
see
the
shares
up
around
20%
since
the
start
of
the
year
as
of
last
Friday’s
market
close
of
$641,435
($428.36)
per
Class
A
(B)
share
relative
to
the
13%
gain
posted
for
the
benchmark
index.
We
also
found
it
surprising
to
see
the
shares
trade
as
high
as
$671,370
($446.15)
per
Class
A
(B)
share
on
July
17,
2024,
which
was
equivalent
to
1.72,
1.53,
and
1.42
times
estimated
book
value
per
share
for
2023,
2024,
and
2025,
respectively,
well
beyond
their
normal
range.

Berkshire
Hathaway’s
Economic
Moat
Rating

We’ve
historically
believed
that
Berkshire’s
moat
is
more
than
the
sum
of
its
parts,
although
the
parts
are
fairly
moaty
on
their
own.
The
insurance
operations
–
Geico,
Berkshire
Hathaway
Reinsurance
Group,
and
Berkshire
Hathaway
Primary
Group
–
remain
important
contributors
to
the
overall
business.
Not
only
are
they
expected
to
account
for
around
32%
of
the
firm’s
pretax
earnings
(and
50%
of
our
valuation
of
it),
but
they
are
overcapitalized,
maintaining
a
larger-than-normal
equity
investment
portfolio
for
a
property
and
casualty
insurer.

They
also
generate
low-cost
float
(temporary
cash
holdings
arising
from
premiums
collected
in
advance
of
future
claims).
This
lets
Berkshire
generate
returns
on
these
funds
with
assets
commensurate
with
the
duration
of
the
business
being
underwritten.
And
they
tend
to
come
at
little
to
no
cost
to
Berkshire,
given
the
company’s
proclivity
for
generating
underwriting
gains
over
the
past
several
decades.

Financial
Strength

Berkshire’s
strong
balance
sheet
and
liquidity
are
among
its
most
enduring
competitive
advantages.
Its
insurance
operations
are
overcapitalized,
carrying
greater
equity,
fixed
income,
and
cash
relative
to
its
reserves.
The
company
generates
large
amounts
of
free
cash
flow
and
maintains
significant
cash
on
its
balance
sheet,
amounting
to
$167.6
billion
at
the
end
of
2023.

Berkshire
likes
to
keep
$30
billion
in
cash
on
hand
as
a
backstop
for
its
insurance
operations,
with
each
of
the
firm’s
businesses
likely
requiring
at
least
2%
of
annual
revenue
as
operating
cash,
with
additional
carve-outs
set
aside
for
capital
expenditures.
As
a
result,
by
our
estimate,
Berkshire
entered
2024
with
an
excess
cash
balance
of
around
$126
billion
–
dry
powder
that
could
be
used
for
acquisitions,
investments,
share
repurchases,
or
dividends.

Our
Uncertainty
Rating
for
Berkshire
is
Low.
We
do
not
consider
any
environmental,
social,
or
governance
issues
material
enough
to
affect
our
uncertainty
rating.
This
is
due
to
the
firm’s
lower
exposure
to
some
of
the
main
ESG
risks
inherent
to
its
industries.

Risk
and
Uncertainty

That
said,
Berkshire
has
tended
to
score
lower
on
governance
issues
because
of
the
makeup
of
its
board
and
board
committees,
the
unequal
voting
structure
of
its
Class
A
and
Class
B
shares,
and
its
opaqueness
and
lack
of
engagement
on
governance
issues.

Following
the
death
of
Charlie
Munger
in
November
2023,
Berkshire’s
main
employee
risk
rests
with
CEO
Warren
Buffett,
who
has
been
responsible
for
almost
all
the
firm’s
investment
and
capital
allocation
decisions.
With
Buffett
turning
94
at
the
end
of
this
month,
it
is
increasingly
probable
that
our
valuation
horizon
will
exceed
his
lifespan,
with
the
quality
of
investment
returns
and
capital
allocation
likely
being
affected.

Berkshire
Hathaway
Bulls
Say

•
Book
value
per
share,
a
good
proxy
for
measuring
changes
in
Berkshire’s
intrinsic
value—increased
at
an
estimated
18.3%
CAGR
during
1965-2023,
compared
with
a
10.2%
annualized
return
for
the
S&P
500
TR
Index.
•
Berkshire’s
stock
performance
has
generally
been
solid,
increasing
at
a
12.1%
(11.8%)
CAGR
during
2019-23
(2014-23),
compared
with
a
15.7%
(12.0%)
average
annual
return
for
the
S&P
500
TR
Index.
•
At
the
end
of
2023,
Berkshire
had
$168.9
billion
in
insurance
float.
The
cost
of
its
float
has
been
negative
for
much
of
the
past
two
decades.

Berkshire
Hathaway
Bears
Say

• Given
its
size,
Berkshire’s
biggest
long-term
hurdle
will
be
its
ability
to
consistently
find
meaningfully
large
deals
that
add
value.
•
Another
big
issue
facing
the
firm
is
the
longevity
of
CEO
Warren
Buffett
(who
turns
94
at
the
end
of
this
month),
especially
following
the
death
of
longtime
managing
partner
Charlie
Munger
in
November
2023.
•
Berkshire’s
insurance
business
faces
competitive
and
highly
cyclical
markets
that
occasionally
produce
large
losses,
and
several
of
its
noninsurance
operations
are
economically
sensitive
and
focused
on
US
markets.

This
article
was
compiled
by
Tom
Lauricella.

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