My analysis of Berkshire Hathaway's fourth-quarter and 2023 earnings
Today, I'm continuing my series on Berkshire Hathaway (BRK-B)...
On Saturday, the company released its fourth-quarter (and year-end) earnings report and CEO Warren Buffett's annual letter. (You can read the entire report and letter here and the press release here).
Over the past two days, I've discussed Buffett's annual letter (Monday's e-mail is here and yesterday's is here). And today, I'd like to review the earnings report.
Berkshire's GAAP net income skyrocketed for both the quarter and the year. But this was largely due to mark-to-market losses in the investment portfolio in 2022, which are largely meaningless over short periods of time.
However, there was plenty of good news from the operations of Berkshire's wholly owned businesses. Here's the breakdown in this table from the press release (the dollar figures are in millions, except for per-share amounts):
Operating earnings grew a robust 28% and 21% during the quarter and year, respectively. These increases were driven almost entirely by Berkshire's insurance operations, as you can see in this table from the press release (the dollar figures are in millions):
Item 7 in Berkshire's 10-K provided further details – here's the breakdown:
Overall, operating earnings (excluding investment and derivative contract gains and losses) have grown massively from $27.6 billion in 2021 to $30.9 billion in 2022 to $37.4 billion in 2023. That's a gain of about 35% in the past two years.
Interestingly, however, the gains haven't been across the board...
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 – have been performing poorly, with profits down substantially in the past two years. Both of which Buffett discussed at length in his annual letter.
In short, both remain very good (I wouldn't say great) businesses... but are facing a number of short-term headwinds.
In particular, I think BNSF would be well served to start adopting more of the "precision railroading" techniques pioneered by industry legend E. Hunter Harrison and adopted by most railroads other than BNSF.
Fortunately, the losses in BNSF and Berkshire Hathaway Energy have been far more than offset by spectacular growth in Berkshire's vast insurance operations in both major areas: underwriting and investment income.
Regarding the former, Berkshire – led here by the incomparable Vice Chairman of Insurance Operations Ajit Jain – has maintained its underwriting discipline. All the while (to quote from the 10-K)...
Earnings in 2023 benefited from relatively low losses from significant catastrophe events [like hurricanes, floods, wildfires, earthquakes, etc.] during the year and improved underwriting results at GEICO compared to 2022, reflecting the impacts of premium rate increases and lower claims frequencies.
And on the investment side, profits boomed because Berkshire holds $168 billion in cash plus $24 billion in bonds. These were earning next to nothing two years ago... But now that interest rates have soared, they are earning much more in annual interest income.
Turning to the cash flow statement, cash flows from operating activities came in at $49.2 billion in 2023 – up 32% from 2022's $37.4 billion. So on this critical metric, Berkshire is doing even better than the net and operating income it reports on its income statement.
Capital expenditures were $19.4 billion in 2023 – up from $15.5 billion in 2022 – so Berkshire continues to invest heavily in maintaining and growing its many businesses.
During 2023, Buffett – and his colleagues Ted Weschler and Todd Combs, who are his hand-picked successors on the investing side of the business – purchased $16.5 billion of stocks and sold $40.6 billion.
That means they were net sellers to the tune of $24.1 billion – which isn't surprising given it was a strong year for stocks. As such, they banked some gains, especially in Apple (AAPL).
This is a reversal from 2022. That year, amid the sharp drop in the market, Buffett bought $67.9 billion of stocks and only sold $33.7 billion, for a net of $34.2 billion.
Lastly, let's look at share repurchases...
Buffett started buying back shares in 2018 and really ramped it up in 2020 and 2021.
He then slowed buybacks to a trickle in early 2022 as Berkshire's share price hit an all-time high (and briefly reached my estimate of intrinsic value).
But as the stock (and markets) pulled back, Buffett resumed buying in size in late 2022 and the first quarter of last year before pulling back a bit during the rest of the year. In total, Buffett bought back a healthy $9.2 billion in his stock last year.
Tomorrow, I'll continue this series and share my updated 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.