Berkshire Hathaway Q4 Earnings: Why My Holdings Nearly Doubled (NYSE: BRK.B) | Private Equity Weekly

Berkshire Hathaway (NYSE:BRK.B) (BRK.A) released its fourth-quarter earnings on Saturday, February 24.The release handily beat revenue and EPS estimates (“Earnings per Share”).Although not all shareholders were pleased with Berkshire’s fourth-quarter results result, I found them to be adequate.sit in a apple (AAPL) I suspected a position that was already overvalued, so I sold shares of the company to buy more Berkshire Hathaway, increasing my stake by 71%.

Ironically, Apple itself is Berkshire Hathaway’s primary holding company. I bought back a small portion of the Apple stock I sold indirectly through Berkshire Hathaway. However, Berkshire Hathaway’s substantial investment in Apple may be overstated.People like to point out that Apple owns 50% of Berkshire stock portfoliowhich is correct if you restrict the definition to “Equity” in public stocks.Berkshire’s $174 billion Apple’s holdings account for 16.2% of total assets and 30.6% of shareholders’ equity. By any measure, it’s well below 50% of Berkshire’s portfolio.

The point is: Berkshire Hathaway and Apple are not in the same financial shape. An investment in Berkshire stock is not only a glorified bet on Apple, but also a bet on a diversified portfolio that holds the largest stake in Apple. It’s also a much cheaper “bet” than Apple, so I feel it’s smarter to increase Berkshire’s holdings than to continue holding Apple stock.

That’s not to say I’m buying more Berkshire shares just because of valuation. The stock earns a C- valuation from Seeking Alpha’s Quantitative Rating, but that doesn’t mean it’s “extremely” cheap. However, Berkshire’s recent fourth-quarter earnings were very good, with operating profits achieving double-digit growth. Some segments are not doing so well, such as BNSF, whose revenue is lower than in 2019! Still, the overall package seemed to be working, so I bought more shares.

My two previous articles on BRK.B rated the stock a Buy and a Strong Buy, in that order. In the first, I rated the stock a Buy because the successful bet in Japan proved that Berkshire’s strong capital allocation capabilities remain intact; in the second, I rated it a Strong Buy “In” because it’s cheap and poised to hit new highs. The stock later rebounded and reached what I predicted would be a “new high.” I’m still fairly bullish on Berkshire Hathaway today, but we need to take into account the highs that have been reached. The stock has become more expensive; therefore, I am lowering my rating back to Buy.

Why Berkshire is still a good investment

Since Berkshire Hathaway’s sheer size limits its potential returns, it makes sense to start this analysis by discussing how Berkshire Hathaway could still be a good investment in theory. In other words, we need to prove that very large companies are worth owning. This is no small problem: A company with assets under management equivalent to the world’s money supply cannot grow faster than the money supply.

A milder version of this rather extreme dynamic applies to today’s “mega” corporations: they certainly able outperform, but their ability to do so is limited by their size. If you invested 100% of your net worth in a $1 billion company, your net worth would be $10 billion. If Berkshire invested $1 billion in a company and then sold it for $10 billion, that would have little effect.Therefore, the dimensions are indeed performance anchor.

So, with a massive market capitalization of $891 billion, can Berkshire beat the market today?

Theoretically, nothing can stop it from happening.As I wrote in an article recent tweetsBerkshire Hathaway has slightly outperformed the S&P 500 over the past five years. It’s entirely possible that it will continue to do so. A company with 6% of its operating space can do better than that space simply by investing more carefully than other companies. Berkshire Hathaway’s outperformance of the S&P 500 tends to increase during the following periods: very expensive stock is collapsing. Granted, Berkshire is facing a lot of expensive stocks these days: It’s too big for a $1 billion deep value investment to have much of an impact on its performance. However, it could choose to invest in Treasury bonds instead of stocks. Today, with the Nasdaq 100 P/E ratio pushed up 35 times, it might be wise to do so.Indeed, Buffett yes As of the fourth quarter, cash reserves reached a record $167 billion.

Fourth quarter and full year results

Having established that Berkshire Hathaway stock has the potential to do well, I can now begin to build a case that it is likely to do well.Such a case could be built on a company’s most recent fourth quarter and full year earnings release/annual report.

The key numbers for the season are:

• GAAP net profit was US$37.5 billion, an increase of 107%.

• Investment income was US$29.1 billion, an increase of 153%.

• Operating income was US$8.4 billion, an increase of 28%.

The same numbers for the whole year are:

• GAAP net income increased by $96.7 billion compared with losses.

• Investment income increased by $58 billion compared with losses.

• Operating income was US$37.35 billion, an increase of 21%.

Overall, the growth is satisfactory. This quarter, the operating profit of each segment is as follows:

• Insurance coverage amounted to US$848 million, an increase of 430%.

• Insurance investment income was 2.76 billion yuan, an increase of 38%.

• Railway expenditures were US$1.355 billion, a decrease of 7.7%.

• $632 million from utilities and energy, down 14.4%.

• Other business income was US$3.69 billion, down 0.48%.

• Other losses (including foreign exchange changes, etc.) were US$804 million, an improvement from US$1.45 billion.

The breakdown results include some unattractive metrics. For example, BNSF’s operating performance deteriorated far more than other railroads during the same period. Ridership and revenue are declining across the rail industry, but Berkshire is feeling the impact of this trend more than other companies. However, strong insurance results had a more significant impact.

Some have criticized Geico and other Berkshire insurance subsidiaries for being too cautious and not seeing much growth in premiums compared with other insurance companies. Geico’s premium growth certainly isn’t as fast as that of companies like Progressive ( PRG ), but it’s also doing better combined ratio Than what that company does. Berkshire’s insurance division pays out smaller claims than most other large U.S. insurance companies. If a major disaster strikes a large swath of the United States, Berkshire’s insurance companies will be better positioned to weather the storm than most other insurance companies. The fact that the company’s insurance profits are still rising despite all these risk management measures is a testament to Ajit Jain’s great job running Berkshire Insurance.

Valuation

After looking at Berkshire’s earnings, we can now start valuing the stock. I will do this primarily using multiples from Seeking Alpha Quant; however, I will manually calculate the P/E ratio using operating income.

Berkshire Hathaway’s operating profit for the trailing 12 months was $37.35 billion. As of the end of the period, the company owned the equivalent of 2.173 billion Class “B” shares. As a result, Berkshire’s earnings per “B” share were $17.188. Using this as revenue, we have the following multiples:

• Price to earnings ratio: 23.8.

• Price/Sales: 2.45.

• Price per book: 1.7.

• Price/cash flow: 18.

Berkshire’s price-to-earnings ratio relative to the S&P 500 is difficult to describe.The P/E ratio is currently slightly higher than the index (i.e. 23.2 hours), but the price-to-book and price/cash flow ratios are much lower. Overall, I think Berkshire shares are cheaper than its benchmark, but I wouldn’t say those who think otherwise are out to lunch. I understand where they are coming from.

Turning to discounted cash flow: If you assume 0% growth and don’t use a risk premium, Berkshire’s TTM free cash flow doesn’t support buying the stock. In fact, it resulted in a fair value estimate significantly lower than the current share price. However, Berkshire’s cash flow and operating profits have been growing significantly recently. If it can maintain these results, its stock should appreciate significantly.

bottom line

Berkshire Hathaway’s bottom line is that its 2023 earnings will be satisfactory. There are weaknesses in some areas, but strengths in many more. Berkshire Hathaway isn’t the cheapest stock on the planet right now, but it grew at a relatively modest valuation. Overall, I think today’s investment is worth it.