USB - Berkshire Hathaway Q1'23 Earnings' Book Value Estimates Will Repurchases Return In Force In 2023?

2023-04-03 13:47:37 ET

Summary

• After outperforming the S&P 500 by 15% in 2022, Berkshire underperformed by 7.5% in Q1.
• Berkshire's equity book gained 9.5% to $335.4 billion, almost entirely on strength from Apple.
• Price/book fell to 1.35x as Berkshire shares declined from $318 to $308 while Apple surged and the business continued to generate cash.
• With no announced acquisitions on the horizon and a valuation in the middle of the recent historical range, share repurchase could accelerate in 2023.

After outperforming the S&P500 by 15% in 2022, Berkshire Hathaway ( BRK.A ) ( BRK.B ) underperformed the S&P500 by 7.5% in Q1.

While Berkshire itself has not done as well, its portfolio value increased in Q1 while the operating businesses should turn in a respectable quarter, though many of them could see small year over year declines.

Q1 Holdings Update

The value of Berkshire's investments in equity securities excluding Kraft Heinz ( KHC ) rose $29.1 billion, or 9.5% to $335.4 billion from $306.3 billion last quarter, almost entirely on strength from Apple ( AAPL ) offsetting weakness from ( OXY ), Chevron ( CVX ), and Bank of America ( BAC ).

I'm impressed with Berkshire selling out of U.S. Bancorp ( USB ), which is no longer on the above list, as it has one of the worst duration mismatches among the larger banks.

From the $29.1 billion gain, after increasing the liability for future income taxes on the balance sheet as "income taxes, principally deferred" and subtracting 21%, we see a net book value gain of $23 billion for Q1.

Q1 Operating Earnings

Insurance underwriting will likely be flattish, as GEICO continues to recover. I'll give GEICO the benefit of the doubt here, as this seems to be an industry wide challenge. A quick personal story, my car insurance with State Farm has cost about the same over the last five years, as I've gotten progressively older (and hence, less risky) even as I've upgraded to more expensive cars. My premium just jumped 16% with my last renewal despite no changes in my driving record.

I'm not expecting a repeat of last year's performance for BH Reinsurance, but hopefully Q1 is mildly positive, helped by the acquisition of Alleghany (the results of which are split between BH Primary and BH Reinsurance.)

I'll estimate a breakeven quarter for this group, and believe the results will improve in subsequent quarters.

Insurance investment income should come in around $ 2.1 billion , driven by higher short term interest rates and increased dividends, offset by lower cash balances to purchase the additional stake in Pilot and additional open market purchases of OXY.

Railroad, utilities, and energy should be down low single digits from last year. Railway volumes are down 11% from this time last year. Q1 is one of the weaker seasonal periods for BHE, who is also impacted from the real estate slowdown, since Berkshire Hathaway Homeservices is reported under BHE.

I estimate $ 1.8 billion in earnings from this group.

Other businesses containing dozens of companies like Precision Castparts, Lubrizol, Marmon, and other industrial businesses, will likely be down high single digits from this time last year. Bright spots from early last year, namely Forest River RV and the building products franchises should show steep year over year declines. The aviation businesses should show some strength, as should the automotive business.

On an apples-to-apples basis, I'll estimate $ 2.2 billion in earnings again from this group.

Starting this quarter, Pilot will be reported in this group. Berkshire was set to pay $8.2 billion for an additional 41.4% interest in Pilot on January 31, 2023 and become the majority owner. I'm very interested to see the current run rate results for Pilot, since that figure seems high to me.

I'll estimate Pilot's contribution at $ 250 million , which assumes a 6% return on its $20 billion valuation.

Other should produce a $ 800 million gain driven by equity earnings from Kraft Heinz, Occidental, and Berkadia, plus weakness in the US Dollar, offsetting the usual expenses (mostly amortization from past acquisitions.)

In total, I expect Q1 operating earnings around $ 7.15 billion , up slightly from last years $7.05 billion.

Current Book Value

As reported in Berkshire's 2022 10-K book value as of December 31, 2022 was $472.4 billion.

Adding the net gain of $23 billion from the equity investments to $7.15 billion in operating earnings, I project Q1-23 book value at $502.6 billion.

Berkshire's market cap as of March 31st was $675.7 billion. Dividing this by $502.6 billion yields a Price/Book Value of 1.35x for Q1.

2023 Outlook and Recommendations - Will Repurchases Return?

I took a lot of friendly fire from fellow Berkshire longs in mid January when I suggested Berkshire was overheated and suggested hedging or selling could be a good move for some.

Since then, Berkshire is down 3.6% while the S&P500 is up 4% and Apple is up 23.5%. The takeaway here is to always remain intellectually flexible and open minded about any investment, no matter how well it's treated you in the past or how much you respect it. For most owners, it wasn't so overvalued and the best move was just to do nothing and expect a slightly lower future return.

The silver lining in the underperformance is that Berkshire is back to a recent average range where they've repurchased significant amounts of shares. Berkshire was more active acquiring businesses last year, but I believe we could see that swing back to repurchases this year, which had slowed considerably in 2022.

I believe the reason repurchases slowed last year was because the shares were a bit overheated and cash started earning a reasonable return. Remember Buffett's guidance from the 2021 annual report .

I want to underscore that for Berkshire repurchases to make sense, our shares must offer appropriate value. We don’t want to overpay for the shares of other companies, and it would be value-destroying if we were to overpay when we are buying Berkshire. As of February 23, 2022, since year-end we repurchased additional shares at a cost of $1.2 billion. Our appetite remains large but will always remain price-dependent. It should be noted that Berkshire’s buyback opportunities are limited because of its high-class investor base.

I'm hoping that we see an accelerated pace of repurchases in 2023, which I believe are value added at current levels.

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