Warren Buffett’s Berkshire posts 8% drop in operating earnings as railroad business sags

This is more indicative of the company’s earnings power, given that quarterly currency volatility has little impact on Berkshire’s underlying earnings power.

Stock repurchases totaled $2.6 billion, up from $1 billion in the third quarter, bringing the total for 2022 to $7.9 billion. That’s down sharply from $27 billion in 2021 and $24.7 billion in 2020.

Berkshire’s operating earnings per share for the fourth quarter, which exclude changes in the value of the company’s investment portfolio, fell 7% to about $4,585 per class A share, Barron’s estimates. That fell short of the FactSet consensus estimate of $5,305 a share.

Berkshire’s total earnings in the quarter were down 53% to $18.1 billion, reflecting lower investment gains in the period. Most of the investment gains are unrealized gains in Berkshire’s big equity portfolio. CEO Warren Buffett tells investors to focus on the operating earnings because the overall result can be swamped by quarterly changes in the value of the equity portfolio.

For the year, Berkshire’s operating earnings rose 12% to a record $30.8 billion after taxes.

Berkshire’s book value per share stood at about $323,600 per class A share at the end of 2022, Barron’s estimates, down from $342,600 at year-end 2021, reflecting a drop in the value of Berkshire’s equity portfolio during the year.

Berkshire had $53.6 billion of investment losses during 2022, including $58.6 billion of unrealized losses on the equity portfolio, which stood $309 billion at year-end.

This marked only the fourth annual decline in book value during Buffett’s 58 years at the helm.

Book value, however, rose in the fourth quarter from roughly $310,000 on September 30.

Berkshire’s Class A shares, which finished Friday at $461,705, now trade for 1.4 times the year-end book value. The current price-to-book ratio is somewhat lower due to the increase in the value of Berkshire’s equity portfolio since the start of 2023, paced by Apple
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 the company’s largest equity holding.

Berkshire continues to sit on a large amount of cash, even after paying nearly $12 billion for insurer Alleghany in October. Berkshire’s total cash and equivalents, mostly Treasury bills, stood at $128 billion on Dec. 31, compared with $109 billion on Sept. 30.

It appears that Berkshire sold a chunk of Alleghany’s bond portfolio, which totaled about $15 billion at midyear 2022, and the bulk of Alleghany’s equity portfolio of around $3 billion.

Berkshire continued to buy back stock after the start of 2023, repurchasing an estimated $700 million through Feb. 13, the date of the company’s 10-K report.

Berkshire disclosed in the 10-K that it paid $8.2 billion for a 41.4% stake in Pilot Co. in late January, under an agreement reached with the Haslam family in 2017 when Berkshire bought an interest of 38.6% in the truck-stop operator. Earlier this month, Barron’s suggested Berkshire might pay $7 billion for the new stake.

The price for the 41.4% interest is more than double the nearly $3 billion that Berkshire paid for the initial stake and brings its total interest in the parent of Pilot Flying J truck stops to 80%.

The purchase price for the 41.4% implies a total equity value on Pilot of $20 billion and highlights one of Buffett’s better investments during the past decade.

Berkshire said in the annual 10-K report that due to rate increases, its Geico auto-insurance unit is expected to generate an underwriting profit in 2023, after an underwriting loss of $1.9 billion in 2022. Geico, one of the top three auto insurers in the country, has been moving to raise rates on policyholders to offset higher costs for claims, including labor and parts.

The swing in Geico’s profits anticipated for 2023 should bolster Berkshire’s earnings this year. Geico’s voluntary policies in force fell by 1.7 million in 2022, and it may have lost its position as the No. 2 auto insurer in the country to arch rival Progressive, which has bested Geico with much stronger technology for pricing policies, including the use of real-time driving information, or telematics.

The forecast of 2023 underwriting profits for Geico indicate that changes implemented by CEO Todd Combs are having a beneficial impact. Combs, who also runs part of the Berkshire equity portfolio, was installed as Geico CEO three years ago.

Berkshire continues to benefit from higher interest rates on its cash–mostly held in Treasury bills–and increased dividend income on its equity portfolio. Insurance investment income was up 66% in the fourth quarter, to $2 billion after taxes, and rose 35% for all of 2022 to $6.5 billion. This is another factor that should bolster 2023 profits at the company.

Profits at the Burlington Northern railroad were down 13% in the fourth quarter to $1.5 billion and were flat for all of 2022 relative to 2021, at $5.9 billion. Burlington Northern’s results were negatively impacted by lower volumes in 2022 and higher fuel and other operating costs. Revenues rose nearly 12% for the year, helped by higher sales per car load and fuel surcharges. Volumes were down 5.8% for the year.

Berkshire’s powerhouse utility business saw an increase of 24% in fourth-quarter profits to $739 million, and a gain of 8% for the year to $3.9 billion.

The unit, Berkshire Hathaway Energy, is one of Berkshire’s most valuable businesses. It has an implied value of about $90 billion based on the price that the unit paid to Greg Abel, the head of Berkshire’s non-insurance operations, last year for a 1% stake in the business. Abel, 60, is Buffett’s likely successor as CEO. Buffett is 92.

Here is the succession language from the 10-K:

“If for any reason the services of our key personnel, particularly Mr. Buffett, were to become unavailable, there could be a material adverse effect on our operations. Should a replacement for Mr. Buffett be needed currently, Berkshire’s Board of Directors has agreed that Mr. Abel should replace Mr. Buffett. The Board continually monitors this risk and could alter its current view regarding a replacement for Mr. Buffett in the future.”

Berkshire Hathaway Energy, formerly headed by Abel, is one of the largest producers of renewable power in the country and is investing heavily in electricity transmission networks. It also owns several natural-gas
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