My analysis of Berkshire Hathaway's fourth-quarter and 2024 earnings

Picking up where I left off yesterday...

On Saturday, Berkshire Hathaway (BRK-B) released its fourth-quarter and year-end earnings report and CEO Warren Buffett's annual letter, which I covered in yesterday's e-mail. (You can read the entire report and letter here and the press release here.)

So today, let's take a look at the earnings numbers...

While Berkshire's GAAP net income declined for both the quarter and the year, this was largely due to mark-to-market losses in the investment portfolio, 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):

Year over year, operating earnings grew a remarkable 71% for the quarter and a robust 27% for the full year, respectively. These increases were driven almost entirely by Berkshire's insurance operations, as you can see in the top two lines of this table from the press release (the dollar figures are in millions):

Overall, operating earnings (excluding investment gains/losses) have grown massively from $30.9 billion in 2022 to $37.4 billion in 2023 to $47.4 billion in 2024. That's a gain of about 54% in the past two years.

Interestingly, however, the gains haven't been across the board...

Earnings in one of Berkshire's largest segments – North America's largest railroad, Burlington Northern Santa Fe ("BNSF") – were stagnant last year. I've long said that 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.

Earnings at Berkshire Hathaway Energy rebounded, but that's entirely because of lower loss accruals for wildfires – they're still down 5% from two years ago.

But the struggles at these two subsidiaries 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, here's a breakdown of the past three years from Item 7 of the 10-K (the dollar figures are in millions):

We can see an explosion in earnings for auto insurer GEICO, which Buffett noted in his annual letter:

Our insurance business also delivered a major increase in earnings, led by the performance of GEICO. In five years, Todd Combs has reshaped GEICO in a major way, increasing efficiency and bringing underwriting practices up to date. GEICO was a long held gem that needed major repolishing, and Todd has worked tirelessly in getting the job done. Though not yet complete, the 2024 improvement was spectacular.

The rest of the insurance operations, led by the incomparable Ajit Jain, maintained underwriting discipline and benefitted from strong pricing and no significant "monster" catastrophe event (like hurricanes, floods, wildfires, earthquakes, etc.) last year, as Buffett also noted:

In general, property-casualty ("P/C") insurance pricing strengthened during 2024, reflecting a major increase in damage from convective storms. Climate change may have been announcing its arrival. However, no "monster" event occurred during 2024.

Buffett concluded:

All things considered, we like the P/C insurance business. Berkshire can financially and psychologically handle extreme losses without blinking. We are also not dependent on reinsurers and that gives us a material and enduring cost advantage. Finally, we have outstanding managers (no optimists) and are particularly well-situated to utilize the substantial sums P/C insurance delivers for investment.

Over the past two decades, our insurance business has generated $32 billion of after-tax profits from underwriting, about 3.3 cents per dollar of sales after income tax. Meanwhile, our float has grown from $46 billion to $171 billion.

This is simply astounding performance – and it looks likely to continue.

On the investment side, profits boomed because Berkshire holds so much cash – this figure came in at $334 billion at year end – and interest rates have soared in the past few years.

The cash has piled up for three reasons:

• Berkshire produces tons of free cash flow (more than $11 billion last year)
• Stock sales: During 2024, Buffett – and his colleagues Ted Weschler and Todd Combs, who are his hand-picked successors on the investing side of the business – purchased only $9.2 billion of stocks and sold $143.4 billion
• No big acquisitions (a mere $396 million during the year)

This chart from the Financial Times shows the growth of Berkshire's cash over the past 35 years:

And this chart from the Wall Street Journal shows cash as a percentage of assets going back to 1998 through last year's third quarter (it rose slightly to 28.9% in the fourth quarter):

It's worth pondering why Buffett, the most talented capital allocator ever, is letting cash pile up like this.

I think it's simply by default. Sixteen years into a bull market, the valuations of both stocks and private businesses Buffett might buy are high by historical standards – and what Buffett likes to pay for things. And Berkshire is now earning a satisfactory rate on its cash, so Buffett is sitting tight.

I don't think it's a big market call. Buffett certainly hasn't given indications that he thinks the market is in a bubble that's about to pop – which he did during the Internet and housing bubbles.

And I have no doubt he would put 90% of Berkshire's cash to work in an instant if the opportunity presented itself.

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 since then – and purchasing no shares at all the past two quarters:

Again, I don't think Buffett is telling us that his stock is overvalued – but he's likely also saying that it's not significantly undervalued, either.

As you can see in the chart below, Berkshire's stock has had a strong run over the past two years – rising a very healthy 65% and modestly outperforming the market:

In summary, Berkshire's operating businesses are plugging away, with work to be done at BNSF and Berkshire Hathaway Energy, and its insurance businesses are knocking the cover off the ball.

The stock largely reflects Berkshire's quality, safety, and growth, however... so I would characterize it as a comfortable hold for a conservative long-term portfolio. But it's only modestly undervalued – I estimate 5% to 10% – so it's likely to slightly, not significantly, outperform the S&P 500 Index over the next few years.

This is a good outcome – but investors should have reasonable expectations.

Best regards,

Whitney

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