Check out my briefing about Warren Buffett and Berkshire Hathaway; A look at Berkshire's first-quarter earnings
1) I sat down for a 25-minute briefing yesterday with our firm's Director of Research Matt Weinschenk...
Of course, the main topic was Warren Buffett's big announcement that he'll step down as CEO (but remain chairman) of Berkshire Hathaway (BRK-B) at the end of the year.
We discussed what makes Buffett such a special investor, whether Berkshire can maintain its culture after Buffett, and whether the company outperforms without the "Oracle of Omaha" at the helm, among other topics.
This briefing is free to watch – you can check it out here on YouTube.
I'm surprised that Berkshire's stock fell 5.1% yesterday in the wake of the news, as nothing has really changed.
Buffett will likely continue to play a key role for years to come – and, as such, Berkshire will continue to benefit from his experience, relationships, and, during times of crisis, his "halo effect."
2) Meanwhile yesterday, I also covered the highlights from Berkshire's annual meeting – my favorite event of the year. Today, I'll break down the company's first-quarter earnings report, which it released on Saturday (the full 10-Q is posted here and the press release is here).
At first glance, Berkshire appears to have had a terrible quarter, with earnings plunging 64% year over year from $12.7 billion to $4.6 billion. Here's the breakdown from the press release (the dollar figures are in millions, except for per-share amounts):
But to understand what's really going on, we must first set aside mark-to-market changes in the investment portfolio: a gain of $1.5 billion in last year's first quarter versus a loss of $5.0 billion this year. These noncash fluctuations in Berkshire's enormous stock holdings are largely meaningless over short periods of time.
A more relevant metric is operating earnings, which fell 14% during the quarter, as you can see in this next table from the press release (the dollar figures are in millions):
We can see that Berkshire's earnings were flat to slightly up in four of the six segments, offset by a $1.3 billion decline in insurance-underwriting profits and a more than $1 billion decline in "Other" – which the footnote shows was due largely to a $1.3 billion swing in foreign-currency exchange losses (from a $597 million profit in last year's first quarter to a $713 million loss this year).
Like stock fluctuations, this can be ignored.
But what about insurance profits being cut in half?
Looking deep in the 10-Q, we can see that nearly all of it was attributable to the devastating Los Angeles wildfires in January, with Berkshire's "Primary Group" booking approximately $300 million in losses and its "Reinsurance Group" another $770 million.
Reasonable people might disagree on how to think about these losses. In some ways, they're one-time in nature... But investors should expect what Buffett calls "lumpy" returns from Berkshire's vast reinsurance operations.
Overall, however, I was actually pleasantly surprised that Berkshire only incurred $1.1 billion in losses, given how big a player it is and the fact that estimates of total insured losses from the wildfires fall in the range of $25 billion to $39 billion.
And Berkshire's other major insurance operation, auto insurer GEICO, had a solid quarter. As this summary from the 10-Q shows, premiums written rose 6.6% and pretax profit rose 12.7% – reflecting the continued good work of Todd Combs, who took over as CEO more than five years ago (the dollar figures are in millions):
Results were also solid at two of Berkshire's largest segments: North America's largest railroad, Burlington Northern Santa Fe ("BNSF") and one of the largest utilities, Berkshire Hathaway Energy ("BHE").
Turning to the cash-flow statement, cash flows from operating activities came in at $10.9 billion, up slightly from $10.6 billion in last year's first quarter.
Capital expenditures were $4.3 billion – down slightly from $4.4 billion in the same quarter last year – as Berkshire continues to invest heavily in maintaining and growing its many businesses.
Buffett – and his colleagues Ted Weschler and Todd Combs, who have been handling the investing side of the business – were once again net sellers of stocks during the quarter, selling $4.7 billion of stocks while only purchasing $3.2 billion in the quarter. That meant about $1.5 billion of net stock sales.
And with more than $6 billion of free cash flow, Berkshire's cash further ballooned to roughly $348 billion – which, for perspective, is bigger than the market cap of 478 of the companies in the S&P 500 Index.
The big question is: What will Buffett and his designated successor, Greg Abel, do with all of that cash?
They would love to invest it in wonderful businesses at fair prices, either public or private, but they're not finding much – as Buffett lamented at the annual meeting (though he did say, "We came pretty close to spending $10 billion").
Buffett certainly isn't putting it to work buying back Berkshire's shares...
He started doing so in 2018 and ramped it up heavily in 2020 and 2021, but since then the trend has been largely downward – with no repurchases at all in the past three quarters:
I think the reason Buffett has ceased share repurchases is simple: Berkshire's stock has done well over the past year – and has become fully valued (as I'll discuss tomorrow).
Unless this changes or the stock market has a substantial pullback (apparently last month's pullback wasn't enough, as Buffett didn't mention any buying at the annual meeting), I expect Berkshire's cash hoard to continue to grow.
Buffett is likely OK with this in the short term because he may be expecting more turmoil in the markets based on the concerns he expressed at the meeting about tariffs and fiscal deficits.
But at some point, it wouldn't surprise me if Buffett and Abel – perhaps at next year's annual meeting – announce that Berkshire will start returning capital to shareholders via dividends.
If so, I think they might do what big-box retailer Costco Wholesale (COST) does, with a modest ongoing dividend plus occasional large special dividends.
Again, looking ahead to tomorrow, I'll update my estimate of Berkshire's intrinsic value... Stay tuned!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.