icon
icon
icon
icon
Upgrade
icon

Berkshire's operating earnings surge by 39% in Q1; Buffet talks Apple, M&A, AI, and Succession Plans

AInvestSunday, May 5, 2024 9:23 am ET
5min read

Berkshire Hathaway's reported its first quarter results which revealed a significant increase in operating earnings, driven largely by its insurance operations, reflecting the overall robustness of its diverse business empire. The backdrop framed the first annual Berkshire Hathaway shareholder meeting, also known as "Woodstock for Capitalists", since the passing of Charlie Munger, Warren Buffett"s long-time business partner. $BRK.B(BRK.B) $BRK.A(BRK.A)

The meeting highlighted the vital role of Berkshire within the financial community due to its significant market influence and its broad spectrum of operations which provide deep insights into the economic landscape.

The meeting also served as an opportunity for shareholders to become more acquainted with the executives poised to lead Berkshire's future: Ajit Jain, who manages the insurance divisions, and Greg Abel, who oversees all other businesses and is Buffett"s appointed successor. Their presence on the main stage alongside Buffett underscores the strategic importance of leadership transition within Berkshire. 

Abel's forthcoming leadership was further emphasized by Buffett"s endorsement of him not just as CEO but also as the future overseer of Berkshire"s vast investment portfolio, signaling a significant shift in the stewardship of the conglomerate"s extensive assets.

Operating Earnings Surge, Net earnings Tumble

Berkshire Hathaway reported a substantial year-over-year increase in operating earnings for the first quarter, with a 39% jump to $11.22 billion, driven largely by strong performance in its insurance operations. This rise in operating profit reflects the earnings from the conglomerate's wholly owned businesses, notably marked by enhanced premiums and fewer claims in its Geico insurance division, alongside a lack of catastrophe-related losses in its reinsurance operations. Warren Buffett, leading the conglomerate, emphasizes the importance of focusing on operating earnings—$11.222 billion, or $7,796.47 per Class A share—as a true measure of the company's performance, rather than net income which can be affected by market fluctuations.

Despite this strong operating performance, Berkshire Hathaway's first-quarter net earnings saw a significant decline, falling 64% to $12.7 billion due to drops in the paper value of its stock investments and reductions in its Apple holdings. This reflects the volatile nature of unrealized investing gains or losses, which Buffett deems meaningless and misleading for evaluating the conglomerate's real health. 

The report comes against the backdrop of the first Berkshire Hathaway annual shareholder meeting following the November death of Charles Munger, Buffett"s longtime business partner, reinforcing the robust health of the conglomerate's diverse business portfolio that spans railroads, power generation, insurance, and consumer brands like Fruit of the Loom.

The Business Segments and Performance

Berkshire Hathaway's diverse business operations exhibited varying performances in the first quarter:

1. Insurance Underwriting: The insurance underwriting business saw a dramatic increase, with earnings soaring 185% year-on-year to $2.598 billion from $911 million. This surge was largely driven by Geico, which itself experienced a 174% rise in earnings to $1.928 billion from $703 million a year earlier. Additionally, insurance investment income grew by 32%, reaching over $2.5 billion, highlighting a robust period for Berkshire's insurance operations.

2.Railroad Business: The railroad segment, however, faced some challenges. Profits were slightly down at $1.14 billion, compared to the first quarter of 2023. Specifically, BNSF railroad's net earnings dropped by 8% due to decreased shipments of fuel over consumer goods and reduced fuel surcharge revenue, indicating a shift in transportation patterns and revenue streams.

3. Energy Division: Berkshire's energy division showed strong performance, with earnings nearly doubling to $717 million from $416 million in the previous year. This significant growth reflects successful operations and perhaps strategic expansions or efficiencies realized during the period.

4. Retail and Utilities: On the retail front, the Pilot Travel Centers chain of truck stops, which Berkshire took full control of in January, faced a downturn with a 19% drop in net earnings. This was attributed to lower fuel margins and increased operating expenses. Additionally, Berkshire's PacifiCorp utility is dealing with legal challenges, facing investigations and lawsuits related to its potential role in wildfires in 2020 and 2022, which could pose financial and reputational risks.

These varied results across Berkshire Hathaway's portfolio showcase the conglomerate's extensive reach into different sectors, each responding differently to market and operational challenges.

What to do with the Purchasing War Chest

Berkshire Hathaway's cash reserves have swelled to a record high of $188.99 billion, up from $167.6 billion in the previous quarter. This increase surpasses even the CFRA Research estimate of over $170 billion. Warren Buffett has expressed difficulty in finding major acquisition targets that meet his criteria, reflecting his cautious approach towards current market valuations he deems too high. At the recent shareholders meeting, Buffett reiterated his stance of preferring to accumulate cash until a significantly profitable and low-risk investment opportunity presents itself.

Buffett"s commentary suggests a strategic patience in deploying Berkshire's growing cash pile, indicative of his concerns about overvalued assets in today"s market. In his February letter to investors, he hinted that making a large-scale acquisition, similar to those that previously propelled Berkshire's growth, seems unlikely under the current economic climate. This conservative approach underlines Buffett's focus on risk management and capital preservation, aiming to ensure investments that can yield substantial returns with minimal risk.

Apple Stake

Berkshire announced that it had lowered its Apple stake in the first quarter. Despite trimming its stake in Apple by 13% during the first quarter, Berkshire Hathaway still holds Apple as its largest stock investment. The value of its remaining shares is approximately $135.4 billion, a decrease from the previous $174.3 billion. Warren Buffett, Berkshire's CEO, continues to express strong support for Apple, indicating that the sale was a strategic move to realize some profits rather than a shift in sentiment towards the company. 

He reassured shareholders that it's very likely Apple will remain Berkshire's largest common stock holding by the end of the year. Additionally, Buffett praised Apple as an even better business compared to other significant investments like American Express and Coca-Cola, suggesting confidence in its ongoing value. He also hinted that tax considerations played a role in the decision to reduce the stake. 

Despite the sale, Buffett affirmed his long-term commitment to Apple, projecting that Berkshire will continue to hold shares in Apple and it would remain its largest holding, along with American Express and Coca-Cola, into the future under the leadership of his successor, Greg Abel.

He also revealed that Berkshire had completely divested its holdings in Paramount Global (PARA), a media company that has recently faced challenges and has been considering a potential deal. Buffett took full responsibility for the decision, stating, It was 100 percent my decision to sell. We sold all of it and incurred significant losses.

AI Warnings

During his annual shareholder meeting, Warren Buffett warned the audience about the potential dangers of artificial intelligence, particularly concerning scams. He emphasized that AI scams could become the growth industry of all time. Reinforcing his caution, Buffett shared a personal encounter with the risks of AI: a convincingly fabricated video of himself. He expressed concern that such realistic AI impersonations could potentially deceive victims into sending money overseas, illustrating the seriousness of the threat.

Buyback Plan

Berkshire Hathaway increased its stock buybacks, purchasing $2.6 billion in stock, up from $2.2 billion in the previous quarter. Additionally, Berkshire's Class A shares have risen over 11% year to date, hitting an all-time high in late February. The Class B shares have also performed well, gaining more than 12% during the same period.

Succession Plan

The absence of legend Charlie Munger shined the spotlight on Greg Abel and Ajit Jain, who shared the main stage with Warren Buffett. Jain oversees the insurance operations, while Abel manages the rest of Berkshire's businesses and is Buffett's named successor. This year's meeting highlighted their roles. Chris Bloomstran of Semper Augustus Investments noted Abel's strong presence and the depth of leadership, although he mentioned Abel's different style compared to Munger.

Buffett confirmed that Abel will be the next CEO of Berkshire and has evolved his stance on who should handle the company"s investments. Previously, Buffett suggested that two current investment managers would manage the portfolio, but he now supports Abel taking on this responsibility in addition to overseeing operating businesses and potential acquisitions. Buffett expressed confidence in Abel"s deep understanding of business and investment management, indicating a significant shift in how Berkshire"s investment decisions might be handled post his tenure.

$AAPL(AAPL)

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.