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Berkshire Hathaway (NYSE:BRK.B) recently released its earnings for the fiscal second quarter of 2024. The company beat revenue expectations by $3.4 billion, and also showed continued growth in operating earnings. GAAP net earnings declined about 8.5% in the quarter because, although Berkshire’s stock portfolio continued making gains, the gains were less than those seen in the same quarter a year before.
Overall, Berkshire’s second quarter earnings easily beat expectations. Net earnings were nearly three times the average analyst estimate as reported in Seeking Alpha Quant, although the estimate might be for operating earnings only. “Operating income per share”--a metric that was not in the release but can be calculated easily using operating earnings and the share count–was $5.48. That also beat the analyst consensus in Seeking Alpha Quant, so Berkshire’s Q2 earnings results easily surpassed expectations, regardless of which “earnings” you’re looking at.
Berkshire’s second quarter operating results were similar to those seen in the first quarter: strength in insurance underwriting/investing combined with weakness at Burlington Northern Santa Fe. Underwriting profits nearly doubled, while BNSF operating earnings declined slightly.
What was a lot more surprising in Berkshire’s release–and what got a lot more attention–was the changes to the equity portfolio (or rather, the exchanging of much of the equity portfolio for cash and equivalents). At the end of the second quarter, Berkshire’s equity portfolio stood at $284 billion in value. Cash, equivalents and other bonds totalled to $288 billion. So, Berkshire had more money invested in bonds and cash than stocks at the end of the second quarter.
A headline number that many analysts focused on following Berkshire’s Q2 report, was the size of the cash pile. The “pile,” which is really mostly treasuries, swelled to $277 billion in Q2 (the $288 billion I quoted above includes another bond category separate from treasuries). This is by far the biggest Berkshire’s cash pile has ever been, and it would seem to imply that Buffett is feeling bearish on the markets as a whole. It could also mean that he has a big acquisition lined up, but his recent comments on the state of the private markets suggest that that’s not the case.
So should take Buffett’s selling of equities and buying of treasuries, as indicating bearishness on the markets as a whole. One way to trade that–if you think Buffett is worth emulating–is to move your own money out of stocks and into treasuries. That’s the simplest answer. However, Buffett’s Q2 exiting of stocks came with one major exception:
Berkshire Hathaway stock
Buffett bought back $345 million worth of Berkshire stock in the second quarter. The amount purchased was down 86.7% from the Q1 amount ($2.6 billion), so Buffett’s enthusiasm for his own stock appears to have waned in Q2. Nevertheless, you’d conclude based on his buys that Buffett found Berkshire stock somewhat appealing in the second quarter. The purchases of treasuries were much larger than the purchases of Berkshire stock, though, so a true “Buffett clone” would favor treasuries to BRK.B here.
When I last covered Berkshire Hathaway stock, I rated it a buy, and with high conviction too, as I upped my stake in the stock around the same time. Today I still have a fairly bullish opinion on Berkshire, so my rating remains what it was before. However, I’m somewhat less bullish on the stock now than I was when I covered it in May, for reasons I’ll cover in the paragraphs below.
Earnings Recap
Berkshire Hathaway’s second quarter earnings beat expectations on both the top and bottom lines. Some standout metrics included:
Revenue: $93.6 billion, up 1.1% (beat by $3.4 billion).
$11.6 billion in operating earnings, up 15%.
$5.48 in operating earnings per share (beat by $0.48).
$14.08 in GAAP EPS per share.
2.155 billion class B equivalent shares, down 0.8%.
Overall, the results were ahead of estimates, although a few specific segments disappointed. BNSF reported another quarter of declining year-over-year operating earnings, as did Berkshire Hathaway Energy and “other businesses.”
The strongest performer was again insurance. GEICO delivered a large increase in underwriting income, two other segments posted more modest growth. Growth in insurance profit was 53% overall.
Basically, Berkshire performed well in the second quarter. It grew and beat expectations, and it disposed of many winning investments, most notably large chunks of the Apple and BAC stakes. The markets are currently trading at 28 times earnings, so it was probably wise of Buffett to take that money and put it into treasuries–potentially in the last days of said treasuries yielding North of 5%. Bets on long term rate cuts are now so common that the 10 year treasury curve is now a full 1.5 basis points below the Fed’s target range! Still, some very short term treasuries (e.g. the three month) have high yields, so now could be among the last chances to get them while the buying is good.
Valuation
Having looked at Berkshire’s recent results, we can now attempt to gauge what the shares are truly worth.
We can start by looking at the multiples. Some key valuation multiples that Seeking Alpha Quant has on file for Berkshire Hathaway include:
22 times earnings.
12.6 times GAAP earnings.
21.7 times forward earnings.
A 0.01 PEG ratio.
2.5 times sales.
1.6 times book value.
18 times cash flow.
These multiples earn Berkshire a ‘C’ on valuation in Seeking Alpha Quant, and I’m fairly inclined to agree with that rating: BRK.B is modestly valued, but not cheap with a Capital C. This is one of the main reasons why I'm slightly less enthusiastic about Berkshire than I was in May: the stock has simply gotten pricier since then.
We can also gauge Berkshire’s valuation by using operating earnings in place of GAAP earnings, which Buffett thinks is the correct way to value his shares.
Using the past four earnings press releases, I calculated that Berkshire has $42 billion in TTM operating earnings. At the end of the last quarter, there were 2.155 billion Class B equivalent shares outstanding. That leaves us with $19.51 in TTM operating earnings per share. At today’s stock price, that produces a 21.93 P/E ratio, so pretty in line with what Seeking Alpha Quant has on file.
We can also use Berkshire’s operating earnings per share to value its cash flows. The 10-year treasury yield is currently 3.7%. If we discount Berkshire’s cash flow at that rate with no growth assumed, then we get a $527 price target, which represents considerable upside. On the other hand, if we include a 3% risk premium, which gives an overall 6.7% discount rate, then our price target is reduced to $291. Basically, Berkshire is worth the investment if you think that the prospects of it growing 0% or better are not seriously in question. I believe that is the case, so I continue to hold all my Berkshire shares.
A Note on Risks
As an insurance company, Berkshire Hathaway definitely faces operational risks. These include natural disasters, conflicts and disease outbreaks. Conflicts and natural disasters increase the amounts that property insurers have to pay out, while disease outbreaks increase health insurance claims. Both of these types of insurance get more costly (to the insurer) when risks in the physical world rise. Also, if Buffett is right that there are not very many good opportunities out there in the world of equities today, then lower future investment returns could also be thought of as a risk factor for Berkshire.
Nevertheless, Berkshire is so operationally diversified and is investing so conservatively right now, that it is likely one of the least risky companies on the planet. Its cash horde and defensive investments can easily ride out any rises in risk that would threaten weaker insurers. So, Berkshire seems like a good value today–perhaps held in combination with treasuries.
