Berkshire Hathaway's third-quarter earnings and my updated estimate of its intrinsic value
One of my favorite stocks for the past three decades, Berkshire Hathaway (BRK-B), reported third-quarter earnings on Saturday. You can read the press release here and 10-Q here.
I teamed up with my friend and former colleague Glenn Tongue on the following analysis. And, as usual, I'll be updating my estimate of the company's intrinsic value.
So let's dive in...
The headlines are focusing on the 5.8% decline in operating earnings from $13.5 billion to $12.7 billion, as you can see in this table from the press release:
However, as the footnote indicates, currency swings took about $343 million off the quarter versus a gain of $331 million a year earlier. Adjusting for this $674 million difference, operating earnings were $13.4 billion – almost exactly the same year over year ("YOY").
The other areas that showed declines were Berkshire's vast insurance operations...
Underwriting profit fell 43%, mostly due to a 45% pretax decline at Geico. Per the 10-Q, this was due to "higher claims frequencies and average severities, in addition to lower average earned premiums per policy." And investment income from insurance fell 14%, largely because of lower short-term interest rates.
The noninsurance businesses were fine. The railroad, energy, and manufacturing businesses all grew earnings YOY. Burlington Northern Santa Fe's ("BNSF") after-tax earnings rose 19% to $1.7 billion on higher volumes and better efficiency.
The big news was share repurchases. Berkshire bought back $9.6 billion of stock in the third quarter – a record amount – and an additional estimated $2 billion in October. This represents a sharp turn from recent years, as you can see in this chart:
I'm glad to see a ramp-up of share repurchases – especially since Berkshire had been trading at a meaningful 11% discount to its intrinsic value, as I calculated in my September 18 e-mail.
The company ended the quarter with about $352 billion of cash and Treasury bills. This excludes cash from the rail and utility businesses, as well as netting out the T-bill purchases that hadn't yet settled and show up as a payable.
On that basis, cash was down 1.9% from the second quarter – not up, as the gross figure of $377 billion suggests. That fits a quarter in which Berkshire spent $9.6 billion on its own shares and $6.8 billion on acquisitions.
After buying nearly $20 billion in stocks last quarter, Berkshire only sold around $400 million in the third quarter. The largest holdings in its portfolio are unchanged: Apple (AAPL), American Express (AXP), Coca-Cola (KO), Alphabet (GOOGL), and Bank of America (BAC).
Berkshire's B-shares closed Friday at $570.89, up 13.6% year to date and only 1.4% below the all-time high they hit last Wednesday.
Now let's turn to valuation...
To calculate my estimate of its intrinsic value, I take Berkshire's cash and investments per share and add the value of the operating businesses. (I believe Warren Buffett has long used a similar method.)
At the end of the third quarter, cash and investments were $529,100 per A-share. Thanks to the market's rise since then, Berkshire's stock portfolio has gained roughly $3,800 per share. That brings the total to around $532,900.
Next, here's how I calculate Berkshire's pretax operating earnings for the quarter...
First, I take stated trailing-12-month operating earnings of $52.7 billion. Then I adjust for normalized earnings from Berkshire's insurance segment by subtracting $22.5 billion of profits from insurance underwriting and investments.
Then I add back half of the average over the past two years, which is $12.6 billion. (I think this is conservative, given that insurance and investment income has averaged $11.5 billion per year over the past decade, and Berkshire is much bigger now.)
The result is adjusted pretax earnings of $42.8 billion, equal to $30,181 per A-share.
The two components of Berkshire's value are investments and earnings per share ("EPS"). While there have been occasional dips, this is an extraordinary record of consistent growth, as you can see in the chart below:
A conservative, below-market multiple on Berkshire's earnings is 11 times. So with EPS of $30,181, that equals $332,000 per A-share.
Finally, we add cash and investments of $532,900 to the value of Berkshire's operating businesses, which is $332,000. This totals around $864,900 per A-share and $577 per B-share.
Here's a table showing this calculation going back to 2002:
The stock has had a big 15% run-up over the past five weeks. As such, based on Friday's closing price of $856,612 per A-share, it was trading at only 1% below my estimate of intrinsic value.
I think the stock is a buy when it's trading at a 10% or greater discount to intrinsic value. So today, I'd call it a comfortable hold.
My Stansberry's Investment Advisory team and I recommended buying Berkshire's B-shares in late 2023, when they were trading at a 14% discount to intrinsic value. Subscribers who followed our advice since then are up 59%.
If you aren't a subscriber yet, you can find out how to become one right here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. At a charity event on Saturday night, I had the pleasure of reconnecting with journalist Scott Pelley. He spent 22 years as a correspondent at 60 Minutes before being fired in a power struggle with journalist Bari Weiss earlier this year.
Scott interviewed me for a segment on the mortgage crisis that aired in December 2008, and it won an Emmy. You can watch the segment here and read the transcript here. I was interviewed because I gave a presentation earlier that year entitled, "Why We Are Still in the Early Innings of the Bursting of the Housing and Credit Bubbles – And How to Profit From It." You can read it here.
