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Berkshire Hathaway BRK.B reported fourth-quarter earnings on Feb. 22. Here’s Morningstar’s take on Berkshire’s earnings and stock.
What We Thought of Berkshire Hathaway’s Q4 Earnings
Insurance underwriting remains solid as investment income increases: Berkshire’s insurance subsidiaries continued to benefit from tailwinds on both sides of the business. Favorable underwriting conditions (enhanced by a more favorable pricing environment during much of the past five years) and higher short-term interest rates continue to buoy profitability across the property-casualty markets in the insurance industry. Berkshire’s insurance operations, which are expected to account for 39% of its pretax earnings on average for the next five years (and 52% of our firmwide valuation), posted solid earned premium growth during the fourth quarter (and full year), with a combined ratio of 81.6% (87.1%).
Investment income continues expanding as Berkshire invests more capital in T-bills: At the end of 2024, the company had $286.5 billion dedicated to T-bills, compared with $129.6 billion at the end of 2023. Most of the capital invested in Treasuries came from the firm’s sale of large chunks of its holdings in Apple AAPL and Bank of America BAC during the year. This shift lifted Berkshire’s interest income to $5.5 billion in the fourth quarter of 2024 from $1.8 billion in the year-ago period. Dividend income was down slightly from $1.5 billion in the fourth quarter of 2023 to $1.3 billion in the last quarter, no doubt affected by the company’s stock sales.
Berkshire was a net seller of equities in 2024 (and in big fashion), continued buying T-bills: Looking at the insurance investment portfolio, the company’s stock holdings declined to $271.6 billion ($302.7 billion when including its equity method investments in Occidental Petroleum OXY and Kraft Heinz KHC) from $353.8 billion ($382.9 billion) at the end of 2023, owing in large part to Berkshire cutting its stake in Apple by two-thirds and reducing its holding in Bank of America by just over a third during the year. Total sales were $143.3 billion during the year—made up primarily of Apple (selling 605.6 million shares for an estimated $117.6 billion) and Bank of America (352.6 million shares for an estimated $14.7 billion), offset slightly by $9.2 billion of stock purchases.
Noninsurance operations less of a drag on results: Berkshire’s railway, utility/energy, and manufacturing, service, and retailing operations were less of a drag on results. BNSF has maintained its practice of sacrificing more in pricing than its closest Class I railroad competitor, Union Pacific, to secure solid volume growth during much of the past year, which we note is not sustainable over the long run, as it can adversely affect profit margins. Berkshire Hathaway Energy’s pretax earnings improved to $2.3 billion during 2024 from $940 million in the year-ago period, as the company saw a reduction in the loss accruals for litigation arising from wildfires in California in 2020 and Oregon in 2022. And the MSR segment (which for our purposes has always included the results of Pilot Travel Centers) continued to face some sales headwinds in the fourth quarter, even as we saw more stable results for the building products and industrial products divisions, with pretax margins coming in at 7.3% (and 7.8% for the full year).
Repurchases underwhelm as Buffett does not buy back shares for two straight quarters, cash pile rises to record $321.4 billion: Berkshire did not repurchase any shares during the third and fourth quarters, the first time that the company has done so since CEO Warren Buffett started repurchasing shares on a more regular basis in the third quarter of 2018. We were not too surprised, as the shares have hewed relatively close to our fair value estimate (if not exceeded it) for much of the year. The company closed out the fourth quarter with a record $321.4 billion in cash and cash equivalents, up from $310.3 billion at the end of September 2024, and by our estimates, it had around $279.9 billion in dry powder.
Fair Value Estimate for Berkshire Hathaway
With its 2-star rating, we believe Berkshire Hathaway’s Class B stock is overvalued compared with our long-term fair value estimate of $467 per share, an increase from $427 per share, which reflects changes in our forecasts for the company’s operating businesses and insurance investment portfolio.
Our new fair value estimate is equivalent to 1.44 and 1.40 times our estimates for Berkshire’s book value per share, respectively, at the end of 2025 and 2026. For some perspective, during the past five (10) years the shares have traded at an average of 1.45 (1.47) times trailing calendar year-end book value per share. We use a 9% cost of equity in our valuation and assume that at the very least Berkshire pays the required 15% corporate alternative minimum tax on adjusted financial statement income.
Read more about Berkshire Hathaway’s fair value estimate.
Berkshire Hathaway Stock vs. Morningstar Fair Value Estimate
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Economic Moat Rating
We’ve historically believed that Berkshire’s economic moat is more than just a sum of its parts, although the parts that make up the whole are fairly moaty in their own regard. The insurance operations—Geico, Berkshire Hathaway Reinsurance Group, and Berkshire Hathaway Primary Group—remain important contributors to the overall business. Not only are they expected to account for around 39% of Berkshire’s pretax earnings on average the next five years (and 52% of our firmwide valuation), but they are overcapitalized (maintaining a larger-than-normal equity investment portfolio for a property and casualty insurer).
They also generate low-cost float, which is the temporary cash holdings that arise from premiums being collected in advance of future claims. This allows Berkshire to generate returns on these funds with assets that are commensurate with the duration of the business being underwritten. And they have tended to come at little to no cost to Berkshire, given the company’s proclivity for generating underwriting gains the past several decades.
Read more about Berkshire Hathaway’s economic moat.
Financial Strength
Berkshire’s strong balance sheet and liquidity are among its most enduring competitive advantages. The company’s insurance operations are well overcapitalized, carrying greater levels of equity, fixed income, and cash relative to its reserves. Berkshire generates large amounts of free cash flow and maintains significant levels of cash and cash equivalents on its balance sheet, amounting to $276.9 billion at the end of June 2024.
Berkshire likes to keep $30 billion in cash on hand as a backstop for its insurance operations, with each of the firm’s businesses likely requiring at least 2% of annual revenue as operating cash, as well as additional carve outs set aside for capital expenditures. As a result, Berkshire (by our estimates) entered the back half of 2024 with an excess cash balance of around $234 billion—dry powder that could be used for acquisitions, investments, share repurchases, or dividends.
Read more about Berkshire Hathaway’s financial strength.
Risk and Uncertainty
Our Morningstar Uncertainty Rating for Berkshire is Low. We do not consider any environmental, social, or governance issues to be material enough to affect our uncertainty rating. This is due to the firm’s lower exposure to some of the main ESG risks inherent to the industries where it competes. Berkshire has, however, tended to score lower on governance issues because of the makeup of its board and board committees, the unequal voting structure of its Class A and Class B shares, and its lack of engagement and opaqueness on governance issues.
Read more about Berkshire Hathaway’s risk and uncertainty.
BRK.B Bulls Say
Book value per share, which is a good proxy for measuring changes in Berkshire’s intrinsic value, increased at an estimated 18.3% CAGR during 1965-2023, compared with a 10.2% annualized return for the S&P 500 TR Index.
Berkshire’s stock performance has generally been solid, increasing at a 12.1% (11.8%) CAGR during 2019-23 (2014-23), compared with a 15.7% (12.0%) average annual return for the S&P 500 TR Index.
At the end of June 2024, Berkshire had $169 billion in insurance float. The cost of the firm’s float has been negative for much of the past two decades.
BRK.B Bears Say
Given its size, Berkshire’s biggest hurdle continues to be its ability to consistently find deals that not only add value but are large enough to be meaningful.
Another big issue facing the firm is the longevity of CEO Warren Buffett (who turned 94 in August 2024), especially following the death of longtime managing partner Charlie Munger in November of 2023.
Berkshire’s insurance business faces competitive and highly cyclical markets that occasionally produce large losses, and several of its noninsurance operations are economically sensitive and focused on US markets.
This article was compiled by Gautami Thombare.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
