Key Points
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Berkshire’s stock has soared as investors have rotated out of AI stocks.
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The conglomerate’s operating earnings fell nearly 6% in the third quarter.
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However, Berkshire repurchased a record amount of stock in the quarter.
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In its first year without Warren Buffett at the helm, Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB) is having a good year, with its stock up nearly 16% (as of Nov. 9).
It took some time for the stock to find its footing, but ultimately investors have come around to new CEO Greg Abel and also purchased Berkshire because the stock is one of the few $1 trillion market-cap companies that does not live and die with the artificial intelligence trade.
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Berkshire stock is now trading near record levels, but it’s clear that Abel thinks there is more room to run.
Greg Abel. Image source: Getty Images.
Berkshire recently reported Q3 earnings
Berkshire recently reported its third-quarter earnings, with operating profits of roughly $12.7 billion, down 5.8% from the same period a year ago. Berkshire tells investors to look at operating numbers to avoid the volatility that comes with unrealized profits and losses in its roughly $364 billion equities portfolio.
Berkshire’s profits slipped due to struggles in its insurance business, which is one of the largest property and casualty insurers in the U.S. Underwriting income fell nearly 43% year over year, while investment income also slipped. The bulk of the decline reportedly came from GEICO, which experienced higher claims and elevated commissions and advertising expenses.
In a research note following the earnings report, a team of Evercore ISI analysts found the advertising ramp-up in Berkshire’s insurance business to be an interesting development.
“We wonder if renewal pricing decreases will come next. We have been surprised that there hasn’t been more price competition to date, which could be due to a more concentrated market,” the analysts said, according to MarketWatch.
Berkshire also had a tough comparison from a year ago, which featured a milder hurricane season and therefore fewer claim payouts.
That said, Berkshire’s other main businesses, the Burlington Northern Santa Fe Railroad, Berkshire Hathaway Energy, and manufacturing, service, and retailing, all reported higher year-over-year operating earnings. Berkshire’s massive cash hoard also once again grew in the quarter by 3% to over $377 billion.
One sign that Abel is still clearly bullish on Berkshire’s prospects is that the large conglomerate repurchased a record $9.6 billion of Berkshire stock in the quarter, which is double the amount Berkshire repurchased in the first half of the year.
Berkshire hasn’t gotten anywhere close to repurchasing this amount of stock since the third quarter of 2020, when it repurchased $9.3 billion. Berkshire also repurchased virtually no stock in Buffett’s remaining few years as CEO of the company.
Berkshire’s policy is to only repurchase stock when management believes it is trading below its intrinsic value.
Investors often value Berkshire on a price-to-book basis, a common metric for evaluating an insurance company that compares its market cap to its equity.
In the third quarter, Berkshire stock bounced around a bit but frequently traded below 1.5 times its book value. The stock now trades at roughly 1.6 times book value after a strong rally in recent months.
If Berkshire stock remains at this level, it will be interesting to see whether Abel continues to buy back stock at the same pace. While he and the Berkshire team may find the company more fully valued in the near term, Abel may also feel pressure to repurchase stock, especially if the Berkshire team is not seeing more opportunities to deploy capital in the current market.
That’s because of Berkshire’s massive cash hoard. Buffett is viewed as the best investor of all time, so if Berkshire wasn’t putting capital to work, the market trusted he knew what he was doing.
Having been at Berkshire since 1999 and having run Berkshire Hathaway Energy before being named CEO, Abel is certainly no slouch, but he also faces the impossible task of replacing Buffett, which is likely to put more pressure on him to return capital to shareholders.
Still, I doubt he would be repurchasing a record amount of stock like this if he didn’t think shares were inexpensive. While Berkshire has greater exposure to artificial intelligence due to its Alphabet position, it has many diverse revenue streams and is less beholden to AI, making it a unique hedge for investors worried about the AI trade.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Berkshire Hathaway, and Evercore. The Motley Fool has a disclosure policy.
