October 3, 2023

Berkshire Hathaway’s operating income after taxes declined 8% in the fourth quarter to $6.7 billion, hurt by declining profits in the company’s rail business and a declining US dollar.

Excluding the decline in the dollar, which increased the value of the company’s BRK.A,

Excluding foreign-currency debt, Berkshire’s operating income for the period would have risen nearly 13% from the 2021 fourth quarter to $7.9 billion.

This is more indicative of the company’s earnings power, given that quarterly currency volatility has little impact on Berkshire’s underlying earnings power.

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Stock repurchases totaled $2.6 billion, up from $1 billion in the third quarter, bringing the total for 2022 to $7.9 billion. This is down sharply from $27 billion in 2021 and $24.7 billion in 2020.

Berkshire’s operating earnings per share for the fourth quarter, which excludes changes in the value of the company’s investment portfolio, fell 7% to approximately $4,585 per Class A share. Baron’s Estimate. This was lower than the FactSet consensus estimate of $5,305 per share.

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Berkshire’s net income declined 53% to $18.1 billion in the quarter, reflecting lower investment gains in the period. Most investment gains are unrealized gains in Berkshire’s large equity portfolio. CEO Warren Buffett told investors to focus on operating income because quarterly changes in the value of equity portfolios can affect overall results.

For the year, Berkshire’s operating income after taxes rose 12% to a record $30.8 billion.

Berkshire’s book value per share at the end of 2022 was approximately $323,600 per Class A share, Baron’s The estimate reflects a decline in the value of Berkshire’s equity portfolio over the course of the year, down to $342,600 at the end of 2021.

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Berkshire was projected to have $53.6 billion in investment losses during 2022, including $58.6 billion in unrealized losses on equity portfolios that end the year at $309 billion.

This marked only the fourth annual decline in book value during Buffett’s 58 years.

Book value, however, increased in the fourth quarter from approximately $310,000 on September 30.

Berkshire’s Class A shares, which closed Friday at $461,705, now trade at 1.4 times year-end book value. The current price-to-book ratio is somewhat lower due to an increase in the value of Berkshire’s equity portfolio since early 2023, propelled by Apple AAPL,
Largest equity holding of the company.

Berkshire still has a large amount of cash after paying nearly $12 billion for insurer Allegheny in October. Berkshire’s total cash and equivalents, mostly Treasury bills, stood at $128 billion at December 31, compared to $109 billion at September 30.

It appears that Berkshire sold a portion of Allegheny’s bond portfolio, worth about $15 billion, through mid-2022, and the bulk of Allegheny’s equity portfolio, worth about $3 billion.

Berkshire continued to buy back stock through the beginning of 2023, repurchasing an estimated $700 million by the date of the company’s 10-K report on February 13.

Berkshire disclosed in a 10-K that it paid $8.2 billion for a 41.4% stake in the pilot company in late January, as part of a deal with the Haslam family in 2017 when Berkshire owned 38.6% in the truck-stop operator. bought interest. earlier this month, Baron’s suggested that Berkshire could pay $7 billion for the new stake.

The 41.4% interest is worth more than double the nearly $3 billion Berkshire paid for the initial stake and brings its total interest in the parent of Pilot Flying J Truck Stops to 80%.

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The purchase price for 41.4% implies a total equity value on Pilot of $20 billion and highlights one of Buffett’s better investments during the past decade.

Berkshire said in the annual 10-K report that its Geico auto-insurance unit is expected to generate an underwriting profit in 2023, following an underwriting loss of $1.9 billion in 2022 due to rate hikes. Geico is one of the top three auto insurers. The country is moving to raise rates on policyholders to offset higher costs for claims, including labor and parts.

The turnaround in Geico’s profits expected for 2023 should boost Berkshire’s earnings this year. Geico’s voluntary policies are set to decline by 1.7 million in 2022, and it could lose its spot as the No. 2 auto insurer in the country to arch-rival Progressive, which has given Geico a superior position with more robust technology for pricing policies. made, including the use. Real-time driving information, or telematics.

The 2023 underwriting profit forecast for Geico indicates that the changes implemented by CEO Todd Combs are having a beneficial effect. Combs, who is also part of the Berkshire Equity portfolio, was installed as Geico CEO three years ago.

Berkshire continues to enjoy the benefits of higher interest rates on its cash — mostly Treasury bills — and increased dividend income on its equity portfolio. Insurance investment income grew 66% to $2 billion after taxes in the fourth quarter, and grew 35% to $6.5 billion for all of 2022. This is another factor that will strengthen 2023 profits at the company.

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Profit at Burlington Northern Railroad fell 13% to $1.5 billion in the fourth quarter and was flat at $5.9 billion for all of 2022 compared to 2021. Burlington Northern’s results were negatively impacted by lower volumes in 2022 and higher fuel and other operating costs. Revenue grew nearly 12% for the year, helped by higher sales per car load and fuel surcharges. Volumes were down 5.8% for the year.

Berkshire’s powerhouse utility business saw a 24% increase in fourth-quarter profit to $739 million and an 8% increase for the year to $3.9 billion.

The unit, Berkshire Hathaway Energy, is one of Berkshire’s most valuable businesses. It has an implied value of about $90 billion, based on the price it paid last year to Greg Abel, head of Berkshire’s non-insurance operations, for a 1% stake in the business. Abel, 60, is Buffett’s likely successor as CEO. Buffett is 92.

Here is the succession language from the 10-K:

“If for any reason the services of our key personnel, particularly Mr. Buffett, become unavailable, our operations may be adversely affected. Should a replacement for Mr. Buffett currently be needed, Berkshire’s board of directors has agreed that Mr. Abel should replace Mr. Buffett. The Board continually monitors this risk and may change its current view regarding Mr. Buffett’s replacement in the future.

Berkshire Hathaway Energy, formerly headed by Abel, is one of the largest producers of renewable energy in the country and is investing heavily in electricity transmission networks. It also owns several natural gas NG00,
line pipe.