Berkshire earnings- What Buffett's cash pile tells us about the markets
AInvestSunday, Aug 4, 2024 10:36 pm ET
2min read
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Berkshire Hathaway's Q2 earnings report highlighted a 15% increase in after-tax operating profit, reaching $11.6 billion, driven by robust insurance underwriting profits and higher income from the company’s substantial cash holdings. Operating profit per share rose 16% to $8,072 per Class A share, surpassing FactSet's consensus estimate of $6,520 per share. Despite this impressive performance, total profit fell to $30.3 billion from $35.9 billion a year earlier, reflecting both operating earnings and paper gains on Berkshire’s equity portfolio, primarily driven by Apple’s share price surge of over 20%.

The insurance segment, particularly Geico, showed significant improvement with a near-doubling of underwriting profits to $2.3 billion. Geico's underwriting profit before taxes soared to $1.8 billion from $500 million the previous year, indicating a successful turnaround. The combined ratio, a key profitability measure, improved to 83% from 95%, highlighting a favorable underwriting profit margin of 17%. Investment income from Berkshire’s cash holdings rose to $3.3 billion, benefiting from higher interest rates on U.S. Treasury bills, which Warren Buffett considers the safest investment.

Berkshire’s railroad business, Burlington Northern Santa Fe (BNSF), saw a slight decline in profit to $1.2 billion after taxes, compared to $1.3 billion a year earlier. The utility operations, under Berkshire Hathaway Energy, also experienced a decrease in profit to $655 million from $785 million. Despite these declines, the overall operating income provided a solid picture of the company's health, as emphasized by Buffett, who advises focusing on operating profits rather than total results distorted by one-time paper gains.

One of the most notable aspects of the report was Berkshire's record cash hoard, which surged to $277 billion as of June 30, up from $189 billion on March 31. This significant increase was largely due to substantial stock sales, primarily Apple. Berkshire reduced its Apple stake by nearly 50%, selling approximately 389 million shares. This reduction, while expected in part, was larger than anticipated, reflecting Buffett's view that Apple, although still a major holding, was fully priced at recent levels. Despite this sale, Berkshire’s remaining Apple stake was worth about $88 billion, making it one of the company’s top positions.

In addition to Apple, Berkshire also began downsizing its second-largest stake, Bank of America, shedding $3.8 billion worth of shares over a 12-day selling spree. This move, along with the reduction in Apple holdings, contributed to the overall increase in cash levels and suggested Buffett’s cautious stance on current market valuations. However, even after these sales, Apple and Bank of America remain among Berkshire’s top holdings, alongside American Express, Coca-Cola, and Chevron.

Berkshire’s cash and U.S. Treasury holdings reached a record high, with $276.9 billion in cash and equivalents, including $234.6 billion in Treasury bills. Buffett’s preference for T-bills, yielding over 5%, underscores his conservative investment strategy, especially in a volatile market. The significant cash reserve has fueled speculation about potential future investments or continued accumulation, given the lack of attractive acquisition candidates both in the U.S. and internationally.

Stock repurchases by Berkshire were notably low in the second quarter, with only $345 million spent on buybacks, down from $2.6 billion in the first quarter and $2.2 billion in the fourth quarter of 2023. This reduction in buybacks may indicate Buffett’s assessment of the stock's valuation or a strategic decision to preserve cash for potential opportunities or challenges ahead.

Despite the sell-off in top holdings and reduced buybacks, Berkshire's operating income continued to rise, marking a quarterly record. The increase was primarily driven by the insurance sector, highlighting the resilience and profitability of this segment. The company's insurance float, representing liabilities under insurance contracts that Berkshire invests, stood at $169 billion, providing a substantial source of investment income.

Berkshire’s top positions, despite recent reductions, still include significant stakes in American Express ($35.1 billion), Apple ($84.2 billion), Bank of America ($41.1 billion), Coca-Cola ($25.5 billion), and Chevron ($18.6 billion). These holdings underscore the company’s long-term investment strategy and its focus on established, profitable companies.

In summary, Berkshire Hathaway's Q2 earnings report showcased strong operating performance, strategic adjustments in top holdings, and a record cash reserve, reflecting Warren Buffett's prudent and cautious approach in an uncertain economic environment. The focus on operating profits, significant cash position, and strategic sales of top holdings like Apple and Bank of America highlight Berkshire's adaptive strategy in navigating the current market landscape.

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