The deal drought hasn’t damped investor enthusiasm for the company.
By Max Reyes, Bloomberg
10 Nov 2023 13:11
Image: David Paul Morris/Bloomberg
Berkshire Hathaway’s cash pile scaled a fresh record at $157.2 billion, bolstered both by elevated interest rates and a dearth of meaningful deals where billionaire investor Warren Buffett could put his money to work.
The hoard — which Berkshire has largely parked in short-term Treasuries — surpassed the previous high set two years ago, the Omaha, Nebraska-based firm said on Saturday. The conglomerate also reported operating earnings of $10.76 billion, a jump on the prior year, as it benefited from the impact of elevated interest rates on the cash pile and gains at its insurance businesses.
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Despite ramping up Berkshire’s acquisition machine in recent years, the company has still struggled to find many of the big-ticket deals that galvanised Buffett’s renown, leaving him with more cash than he and his investing deputies could quickly deploy. After hanging back during the pandemic, he’s since snapped up shares in Occidental Petroleum Corp and struck a $11.6 billion deal to buy Alleghany Corp Buffett has also leaned heavily on share repurchases amid the dearth of appealing alternatives, saying the measures benefit shareholders.
“Cash deployment is definitely slowing,” said Jim Shanahan, an analyst with Edward Jones. “Ultimately Berkshire’s going to start feeling some pressure to put cash to work.”
The deal drought hasn’t damped investor enthusiasm for the company. Its Class B shares crested a record high in September as investors sought out its diversified range of businesses as a hedge against deteriorating economic conditions. And while the shares pared some of those gains, the stock is still up almost 14% for the full year.
The firm also spent $1.1 billion on buybacks in the period, bringing the total for the first nine months of the year to about $7 billion. The conglomerate trimmed its overall equities portfolio in the quarter, making about $5.25 billion on sales net of purchases.
Including investment and derivatives losses, Berkshire posted a loss for the quarter of almost $12.8 billion — wider than the year prior — primarily due to losses on its equities portfolio. Berkshire often recommends that investors look past investment gains or losses, which are tied to accounting rules, saying that can be misleading to investors.
The company operates and invests in all corners of the US economy, owning businesses including Geico, BNSF, Dairy Queen and See’s Candies, meaning investors view the company as a window into broader economic health.
Strength in the insurance unit — plus the inclusion of Pilot Flying J earnings which Berkshire did not include in results last year — helped drive profitability. Berkshire said its insurance businesses posted a profit of $2.42 billion versus a loss in the prior-year period, when the insurance industry was being pummeled by catastrophes.
The company’s Geico unit, which had struggled with unprofitability throughout 2022, also posted a profit compared to the same period a year ago, as it curtailed advertising expenses by 54% year-to-date. The improvement follows efforts by the division to overhaul underwriting after struggling with higher costs for replacing or repairing damaged vehicles. The effort cost it market share — raising the question if it will seek to reclaim that ground.
What Bloomberg Intelligence Says:
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“Berkshire Hathaway’s results again demonstrated diversity of earnings power, boding well in uncertain macroeconomic conditions. Operating-company earnings of almost $10 billion were better than our core scenario as a rebound in Insurance, including favorable reserve trends and higher investment income, offset declining railroad earnings and energy litigation costs.”
Matthew Palazola, BI senior industry analyst, and Eric Bedell, BI associate analyst
Berkshire posted stronger operating earnings despite Buffett cautioning at its annual meeting in Omaha in May that earnings at the majority of its operating units could fall this year as an “incredible period” for the US economy draws to the end. Still, the Federal Reserve’s aggressive pace of rate hikes has helped the firm reap greater yield on the cash it stockpiles primarily in short-dated US Treasuries.
At the same time, those higher rates created headaches for some of Berkshire’s industrial businesses. The conglomerate’s building products businesses saw revenue slip 11% due to the run-up in mortgage rates.
“The effects of significant increases in home mortgage interest rates in the US over the past year has slowed demand for our home building businesses and our other building products businesses,” Berkshire said in a report detailing results. “We continue to anticipate certain of our businesses will experience weakening demand and declines in revenues and earnings into 2024.”
Inflation weighed on other segments of the conglomerate. Profit at BNSF, its railroad operations, fell 15% amid lower freight volumes and higher non-fuel operating costs.
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