ii view: Berkshire Hathaway under pressure to spend cash

The conglomerate bought back a record $9 billion of its own shares this quarter. A sign of value? 

Third-quarter results

• Net earnings attributable to shareholders up 82% to $30.14 billion 
• Operating earnings down 32% to $5.48 billion
• Cash of $145.7 billion
• Share buy-back of $9.3 billion

ii round-up:

Warren Buffett-run conglomerate Berkshire Hathaway (NYSE:BRK.B) reported an 82% jump in headline earnings as investments in companies such as Apple (NASDAQ:AAPL), Coca-Cola (NYSE:KO) and JPMorgan (NYSE:JPM) continued to recover from the very worst of the pandemic falls. 

Net earnings attributable to shareholders rose to $30.14 billion. Shares of Apple, Berkshire’s biggest current investment, rose by just over a quarter in the period. 

Berkshire shares rose by around 5% in post results trading, helped by broader market gains following highly positive Covid-19 vaccine data released by US drugs giant Pfizer (NYSE:PFE). Berkshire shares prior to the results were down by nearly 10% year-to-date.

Berkshire profits excluding investment gains fell by 32% to $5.48 billion. Reinsurance hits from Covid-19 business closures and hurricane Sally and Laura, along with lower profits from aerospace exposed manufacturing operations all feed into the mix. 

Profit for its BNSF railway operations also retreated given an 8.3% drop in pandemic hit volumes, although volumes were better than the near 18% slump suffered in the prior second quarter. The Omaha Nebraska headquartered Berkshire operates over 90 businesses. 

Berkshire used a record $9.3 billion of its $140 billion-plus cash pile to buy back its own shares during the third quarter. Significantly more than the $5.1 billion used in the prior second quarter.

ii view:

Led by legendary investor and businessman Warren Buffett, Berkshire Hathaway is a holding company owning subsidiaries engaged in various business activities. Its segments include Insurance, such as GEICO, reinsurance, railroad operations, gas and electric utilities and manufacturing businesses. Berkshire as an American company offers investors a near one-stop investment destination.  

A group cash balance of over $140 billion continues to pose questions for shareholders. The sum could see Berkshire making a major acquisition, or it could provide for significant shareholder returns. Share buy-backs over the this latest quarter reached a record of $9.3 billion. Buybacks for the year-to-date now total over $15 billion. Recent new investments include holdings in Japanese trading companies such as Mitsubishi Corporation, Bank of America (NYSE:BAC) and recent US IPO Snowflake (NYSE:SNOW).  

But a 16% underperformance compared to the S&P 500 index year-to-date, 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.  

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 recently turned 90

The average rating of stock market analysts:

Buy