Berkshire Hathaway (BRK.A +0.85%)(BRK.B +0.86%) reported its second-quarter earnings a couple of weeks ago, but it just recently gave investors a glimpse of changes in its $300 billion stock portfolio. Now that we have a complete picture of how Berkshire's second quarter went, it's a good time to take a look at some of the key trends to watch.
Warren Buffett announced his intention in May to step down as Berkshire's CEO, and since that time, the stock has declined by more than 10%. Do the numbers say that investors should be concerned, or that the business is running smoothly?
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Berkshire's operating businesses are doing well
Although Berkshire's stock portfolio and its massive stockpile of cash get many headlines, the core of Berkshire Hathaway is its operating businesses. With over 60 subsidiaries that include GEICO, Duracell, BNSF Railroad, a massive utility business, and many others, these are the engines that generate the capital for Berkshire to invest in stocks or add to its bank account.
In the second quarter, Berkshire's operating earnings declined by about 4% year over year, but that doesn't tell the whole story. The decline was mainly due to $877 million in on-paper foreign currency "losses" from Berkshire's non-dollar-denominated debt, compared with a gain of $446 million in the second quarter of 2024, as well as a decline in underwriting profits from the insurance businesses. Underwriting profits can be rather inconsistent because of natural disasters and other factors, so if they trend upward over time, there's no need for concern.
In fact, if we back out the underwriting income and the foreign exchange fluctuations, Berkshire's operating earnings grew by about 10% year over year. There was solid growth in the railroad and energy businesses, as well as the broad manufacturing, service, and retail category that includes dozens of other Berkshire subsidiaries.
Still no buybacks
Berkshire Hathaway's share repurchase plan doesn't have a formal limit as many companies do. In fact, it allows the company to repurchase shares whenever Buffett feels the stock is priced below its intrinsic value.
After spending billions of dollars buying back stock in most quarters since the modern version of the buyback authorization has been in place, Berkshire abruptly stopped buying back stock a few quarters ago. There was much speculation that with the steep decline in Berkshire's stock that occurred after Buffett announced his retirement, but that turned out to not be the case. Berkshire spent exactly $0 on buybacks in the second quarter.
There are a few potential explanations. Maybe Buffett doesn't believe Berkshire is at a substantial discount to intrinsic value. Or maybe Buffett is simply deciding to conserve capital until after he formally steps down as CEO at the end of the year, and plans to leave things like buyback decisions to his successors. But in any case, Berkshire's buybacks, or lack thereof, are worth keeping an eye on.
Buffett wasn't as much of a stock seller as it seems
Berkshire's second-quarter earnings were released nearly two weeks before the company's stock portfolio activity was revealed. And based on the earnings report, it appeared that Berkshire was a net seller of stocks.
Technically, that was true. But if we exclude sales of some Apple (AAPL +1.17%) and Bank of America (BAC +0.90%), which have been ongoing for some time, it turns out that Berkshire was a net buyer. In fact, Berkshire added shares to six existing positions and opened six new ones. Buffett and his team added to Chevron (CVX 3.88%), Constellation Brands (STZ +1.66%), Pool Corp. (POOL +0.56%), and more. And in addition to the new UnitedHealth (UNH +0.94%) investment that has been in the headlines, Berkshire also bought a roughly $850 million stake in Nucor (NUE +0.95%), opened positions in homebuilders Lennar (LEN +5.04%) and D.R. Horton (DHI +1.79%), and bought a (relatively) small position in billboard leader Lamar Advertising (LAMR +1.90%).
The bottom line on Berkshire Hathaway
In a nutshell, Berkshire Hathaway's operating businesses are doing quite well, and although Berkshire hasn't bought back any of its own stock, management is finding more attractive opportunities to put money to work than in the preceding few quarters. With $344 billion in the bank and a new CEO set to take the helm at the end of the year, it will be interesting to watch the massive conglomerate evolve in the post-Buffett era.
