Over the years, Warren Buffett has been opportunistic and “fluid” with his ideals and political opinions – he describes himself as a “democrat” yet without batting an eyelid will demand government bailouts for his portfolio of companies – but he has been steadfast about one thing: he refuses to spend money on stock purchases or corporate acquisitions unless there is significant value to be exploited. In which case, one can probably conclude that the market is still woefully overvalued because earlier today Buffett’s conglomerate Berkshire Hathaway reported solid Q3 earnings but more importantly, revealed a cash pile that had grown by $10 billion in the third quarter to a record $157.2 billion (consisting of $30.8 billion in cash and $126.4 billion in investments in T-Bills, up from $93 billion at the end of last year), and set to overtake Apple’s own cash hoard (which as we noted earlier this week has been declining) of $162 billion as soon as this quarter.
“Cash deployment is definitely slowing,” said Jim Shanahan, an analyst with Edward Jones. “Ultimately Berkshire’s going to start feeling some pressure to put cash to work.”
Perhaps… but not yet; in fact in the third quarter, Berkshire was a net seller of stock for the fourth quarter, liquidating another $5.3 billion in shares and bringing the total sales over the past 12 months to a record $38.3 billion.
Despite ramping up Berkshire’s acquisition machine in recent years, the company has still struggled to find many of the big-ticket deals that galvanized Buffett’s renown, leaving him with more cash than he and his investing deputies could quickly deploy. After hanging back during the pandemic, he’s since snapped up shares in Occidental Petroleum (despite owning 26% of the company, Buffett has said he has no plans to acquire the company outright) and struck a $11.6 billion deal to buy Alleghany. Buffett has also leaned heavily on share repurchases amid the dearth of appealing alternatives, saying the measures benefit shareholders.
Separately, the conglomerate also reported operating earnings of $10.76 billion, a jump on the prior year, as it benefited from the impact of elevated interest rates on the cash pile and gains at its insurance businesses. However, including investment and derivatives losses, Berkshire posted a loss for the quarter of almost $12.8 billion, well above last year’s $2.8 billion loss, which largely came from a decline in its big Apple stake. Shares of the iPhone maker fell 11.7% during the quarter but have rebounded over 3% since.
Strength in Berkshire’s insurance unit, plus the inclusion of Pilot Flying J earnings which Berkshire did not include in results last year, helped drive profitability. Berkshire said its insurance businesses posted a profit of $2.42 billion versus a loss in the prior-year period, when the insurance industry was being pummeled by catastrophes.
Geico, the crown jewel of Berkshire’s insurance empire and Buffett’s “favorite child,” reported another profitable quarter as it curtailed advertising expenses by 54% year-to-date; total underwriting earnings at the unit were $1.1 billion. The auto insurer is in the middle of a turnaround after losing market share to competitor Progressive. The improvement follows efforts by the division to overhaul underwriting after struggling with higher costs for replacing or repairing damaged vehicles. The effort cost it market share — raising the question if it will seek to reclaim that ground.
Berkshire’s railroad, BNSF, however, saw a 15% decline in earnings as the railroad division grappled with lower volumes and higher costs.
Berkshire posted stronger operating earnings despite Buffett cautioning at its annual meeting in Omaha in May that earnings at the majority of its operating units could fall this year as an “incredible period” for the US economy draws to the end. Still, the Fed’s rapid rate hikes helped the firm reap huge returns on the cash it stockpiles mostly in short-dated US Treasuries.
That said, those higher rates also created headaches for some of Berkshire’s industrial businesses: the conglomerate’s building products businesses saw revenue slip 11% due to the run-up in mortgage rates.
“The effects of significant increases in home mortgage interest rates in the US over the past year has slowed demand for our home building businesses and our other building products businesses,” Berkshire said in a report detailing results. “We continue to anticipate certain of our businesses will experience weakening demand and declines in revenues and earnings into 2024.”
The jump in profits has been rewarded by the market, which pushed Berkshire’s Class B shares to a record high in September as investors sought out its diversified range of businesses as a hedge against deteriorating economic conditions. And while the shares pared some of those gains, the stock is still up almost 14% for the full year, in line with the S&P500.
A part of that boost to BRK’s stock came from the company itself: the firm spent $1.1 billion on buybacks in Q3, bringing the total for the first nine months of the year to about $7 billion. The conglomerate trimmed its overall equities portfolio in the quarter, making almost $15.7 billion on sales net of purchases.
As usual, Berkshire Hathaway asked investors to look past the quarterly fluctuations in Berkshire’s equity portfolio.
“The amount of investment gains/losses in any given quarter is usually meaningless and delivers figures for net earnings (losses) per share that can be extremely misleading to investors who have little or no knowledge of accounting rules,” the company said in a statement.
Berkshire also acknowledged the negative economic impact from the pandemic, as well as geopolitical risks and inflation pressures.
“To varying degrees, our operating businesses have been impacted by government and private sector actions to mitigate the adverse economic effects of the COVID-19 virus and its variants as well as by the development of geopolitical conflicts, supply chain disruptions and government actions to slow inflation,” Berkshire said. “The economic effects from these events over longer terms cannot be reasonably estimated at this time.”