ii view: Berkshire Hathaway benefits from recovering US economy

Profit has grown in the past quarter, with the cash mountain now over $145 billion. Buy, sell or hold? 

First-quarter results to 31 March 2021

• Operating earnings up 20% to $7 billion (£5 billion)
• Net earnings attributable to shareholders of $11.7 billion (£8.4 billion), up from loss of $49.7 billion
• Cash of $145.4 billion (£104.7 billion)
• Shares buy-back of $6.6 billion, down from $9 billion in Q4 2020

ii round-up:

Warren Buffett-run conglomerate Berkshire Hathaway (NYSE:BRK.B) reported a 20% increase in its latest quarterly earnings, as economic activity continued to recover from pandemic restrictions during the first quarter of 2020. 

Operating earnings, which excludes gains or losses from Berkshire’s investment portfolio, rose to $7 billion (£5 billion) in the first quarter to the end of March, up from $5.87 billion this time last year. The measure, Mr Buffett’s preferred assessment of performance, was helped by recoveries in earnings from its natural gas energy operations to its manufacturing businesses.

The Omaha, Nebraska headquartered company, which operates over 90 businesses, purchased around $6 billion of its own shares during this latest quarter. That was down from the $9 billion purchased in the prior fourth quarter. The company bought nearly $25 billion of its own shares in the whole of 2020. 

Berkshire shares are up by a fifth year-to-date compared to a gain of 11.6% for the S&P 500 index. Shares of Apple (NASDAQ:AAPL) are little changed over the same time period, while electric vehicle maker Tesla (NASDAQ:TSLA) is down around 3%.

Berkshire’s cash held rose to $145.4 billion (£104.7 billion) compared to $138 billion (£99.4 billion) at the end of the prior fourth quarter. 

The group’s Geico insurance business continued to benefit from reduced accident claims as employees commute less and work from home under ongoing virus caution. Flat revenues for its railroad operations contrasted with falls over recent quarters, while demand for building related products at its manufacturing businesses helped push overall sales nearly 6% higher. 

Quarterly profits including investment gains came in at $11.7 billion. That compares to a loss of $49.7 billion in the first quarter of 2020 given a backdrop of falling stock markets and imposed pandemic lockdowns in the US and Europe.

ii view:

Led by legendary investor and businessman Warren Buffett, Berkshire Hathaway is tracked and invested in by large and small investors alike. Berkshire engages in a range of business activities from insurance and reinsurance to utilities, freight rail transportation and manufacturing. 

For investors, a near 14% underperformance compared to the S&P 500 index over 2020, added to an 18% underperformance over the course of 2019, suggests thinning investor patience with Berkshire’s inability to find a home to invest its cash mountain.  

But Mr Buffett has been seeing value in his own Berkshire Hathaway shares. Share buybacks remain ongoing, with their value increasing from 2019 to 2020, helping to put some of its cash mountain to work. Berkshire share purchases in the likes of Bank of America (NYSE:BAC) during 2020 indicate that investment opportunities are still being found, if not as of yet on a scale to justify a major acquisition. In all, and with distorting central bank action still arguably very much in play on global asset prices, the judgement and experience offered by Mr Buffett’s Berkshire Hathaway remains highly reassuring.   

Positives: 

• Diverse portfolio of industries and businesses
• Company Chairman Warren Buffett is regarded by many as a legendary investor and businessman 

Negatives:

• Subject to macro-economic and geopolitical uncertainties
• Management succession risk - Mr Buffett is in his 90’s

The average rating of stock market analysts:

Strong hold