Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) just released its first-quarter earnings report, and most of the numbers weren't too surprising. Its operating businesses performed rather well, while its stock portfolio declined in value along with the rest of the market.
However, many investors had been waiting to see if Berkshire was able to deploy some of its massive $128 billion cash stockpile during the COVID-19 market crash. While we don't know exactly what stocks Warren Buffett and his team might have bought and sold, we just learned how much cash Berkshire has, as well as how much it may have spent on stocks during the first quarter.
The headline numbers -- and why they don't matter
Berkshire Hathaway reported a pretty large net loss for the first quarter: $49.7 billion, which translates to $20.44 per share.
Here's why investors shouldn't care about this "loss." We all know that Berkshire has a massive stock portfolio -- worth nearly $200 billion considering positions we currently know about. Well, due to accounting rules, Berkshire's unrealized stock gains and losses are included in its quarterly earnings. And we all know what happened in the stock market in March. Berkshire's $49.7 billion loss included $70.3 billion in investment "losses," but this just reflects the market value of the stock portfolio as of March 31, when the market was near its lows.
In contrast to what the stock portfolio might indicate, Berkshire's operating businesses are doing quite well. Just to run down a few key numbers:
- Quarterly operating profit -- the best indicator of how Berkshire's businesses are doing -- increased by 6% year over year.
- Total revenue from Berkshire's operating businesses rose by 1% year over year. The main reason for the slow rise was a decline in revenue from the railroad and energy businesses, as well as a slight drop in revenue from the "other" business category (which includes everything except insurance, railroad, energy, and utilities).
- Insurance premiums increased by 10% as compared with the first quarter of 2019, compared to just an 8% increase in expenses.
Berkshire's cash hoard -- did it finally decrease?
Any shareholders who were expecting Buffett and his team to go on a stock-buying spree in the first quarter are likely to be disappointed.
Berkshire ended 2019 with about $128 billion of cash and equivalents on its balance sheet, a figure that's grown significantly in recent years as the company has struggled to find attractive opportunities. So, when the stock market started to plunge in March, investors were hopeful that Berkshire might finally start to put significant amounts of its capital to work.
Well, you might be in for a surprise. Berkshire had more than $137 billion in cash, equivalents, and Treasury securities on its balance sheet at the end of the first quarter. To be fair, Berkshire does generate billions per quarter from its operating businesses, and the company has an $8.6 billion liability listed on its balance sheet for Treasury securities it recently purchased (which are included in the $137 billion figure). So, it's likely Berkshire was a net buyer of stocks -- just not nearly to the extent investors had hoped.
Another clue is the cost basis of the stocks Berkshire currently owned -- in other words, what Berkshire paid for the stocks currently in its portfolio. At the end of 2019, the cost basis of Berkshire's equity securities was $110.3 billion. As of March 31, it had increased to $113.2 billion. Obviously, there's a lot this doesn't tell us, such as how much stock Berkshire sold during the period, but it does indicate that Berkshire put a few billion to work in the market by the end of March.
How cheap do Buffett and Munger think Berkshire's stock is?
Berkshire's buyback program allows the company to repurchase as many shares as it wants, as long as two conditions are met:
- The company has at least $20 billion in cash and equivalents.
- Both Warren Buffett and Charlie Munger agree the stock is trading for a big discount to its intrinsic value.
Obviously, the first condition isn't a problem. So, the main question is whether the pair thought the stock was a good value in the first quarter.
- Berkshire spent $191.6 million on buybacks from Jan. 3 to Jan. 15 at an average price of about $226 per Class B share equivalent. (Note: The company buys a combination of Class A and B stock, and the "Class B equivalent" is a weighted average of Berkshire's purchases, adjusted for Class B equivalent equity.)
- From Feb. 24 through Feb. 28, Berkshire spent a little over $1 billion at an average price of $214.15 per Class B equivalent.
- From March 2 to March 10, Berkshire spent $369.9 million at an average price of $203.08 per Class B share.
In all, Berkshire spent about $1.7 billion in buybacks in the first quarter. This is a fairly large total compared with recent quarters, but there are two big caveats. While this may sound like a lot of buyback activity, it represents less than 0.4% of Berkshire's market cap. And the buybacks took place before the bulk of the market crash occurred, which is a bit of a disappointment.
Even so, this shows that Buffett and Munger thought shares were trading at enough of a discount to intrinsic value in these three time windows to pull the trigger on some repurchases.
Should investors be happy or disappointed?
On one hand, many investors were hoping Buffett and his stock-picking team would do far more stock buying in the coronavirus market crash than they actually did. And, many were hoping Berkshire had spent billions on buybacks when the stock reached its lowest price-to-book valuation in recent history (Berkshire's share price actually dipped below book value in late March). We now know that these things didn't happen.
With that in mind, there are some positives to keep in mind.
First, a 6% increase in operating profit is an encouraging sign.
Second, it's important to emphasize that this only covers through March 31. Stocks were still fairly cheap (in a recent historical context) in April -- and still are -- so it's entirely possible Berkshire did some buying after the quarter ended.
Finally, while Buffett and his team are known for making savvy investments during tough times, they typically aren't in a rush to put their capital to work at the beginning of a crash. For example, Berkshire's highly profitable Bank of America investment was actually made in 2011, a couple years after the financial crisis ended.
In a nutshell, the best way to label Berkshire's first-quarter earnings report is "a mixed bag." We'll get a little more color on Berkshire's investment strategy and general outlook during its annual meeting, and then later in May when its 13-F filing reveals its latest stock market activity, so stay tuned.