Berkshire rail, insurance units earnings slip on weak demand

(Bloomberg) –Warren Buffett’s Berkshire Hathaway Inc. reported weaker results in some of its key businesses, underscoring fears the US economy is facing a bumpy road ahead. But that didn’t dent the billionaire investor’s optimism about America.

The conglomerate saw operating earnings fall 14% to $6.7 billion in the fourth quarter, as higher prices for materials and labor hit the firm’s rail road and insurance operations. Still, Buffett reminded investors to keep the faith in America’s economy, just as he touted Berkshire’s record operating earnings of $30.8 billion for the year.

“Despite our citizens’ penchant – almost enthusiasm – for self-criticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America,” he said in his annual letter to shareholders published alongside its results on Saturday.

Buffett has long identified his vast collection of businesses as a proxy for the strength of the US economy, with investors combing through results or his rare public comments for any signs of strain. As elevated inflation and measures by the Federal Reserve to contain it continue to threaten economic gloom, Buffett remained optimistic about the resiliency of the US, even calling near-term economic and market forecasts “worse than useless.”

Roads, Insurers

Berkshire’s railroad business BNSF reported $1.5 billion in operating earnings in the fourth quarter, compared with $1.7 billion from the prior-year period. Meanwhile, insurance underwriting earnings fell to $244 million from $372 million.

“While customer demand for products and services was relatively good in 2022, demand began to weaken in the second half of the year at certain of our businesses,” Berkshire said in its results. “We experienced the negative effects of higher materials, freight, labor and other input costs through much of 2022.”

Prospects for the American economy — and Buffett’s own businesses – have become his preferred topics of conversation, as he avoided controversial statements in public comments. But this year he decided to wade into a topic that’s gotten increased attention both on the political stage and in the operations of Berkshire: share buybacks.

“When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue — characters that are not mutually exclusive,” Buffett wrote.

The comment comes after President Joe Biden called for lawmakers to quadruple the levy on corporate stock repurchases alongside a greater tax on billionaires. Democrats have favored such increases in the hopes that they would motivate companies to invest more in the economy and increase wages, but those aspects of the president’s economic agenda are unlikely to pass in a divided Congress.

Berkshire itself has turned toward buybacks more often as high valuations in public markets have made it more challenging for Buffett to identify promising acquisitions. The company spent approximately $2.6 billion repurchasing its own shares in the last three months of 2022, bringing the full-year total to $7.9 billion. Buffett noted that some of the companies Berkshire has bet the most on, including Apple Inc. and American Express Co., deployed similar measures.

Another target in Buffett’s cross-hairs: investment bankers, a familiar adversary.

“Every small bit helps if repurchases are made at value-accretive prices,” Buffett wrote. “Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases.”

Another surprise — the letter’s length. It seemed much shorter compared to previous ones, according to Jim Shanahan, an analyst with Edward Jones. He said that came as a disappointment.

“There wasn’t a lot of meat in here,” Shanahan said. “The letter itself is a little lacking in terms of the wit and wisdom that we’ve become accustomed to seeing.”

Looking Ahead

Buffett also made space to discuss the future of the company, including a likely reference to how much stock his successor Greg Abel holds in it.

“Additionally, our future CEOs will have a significant part of their net worth in Berkshire shares, bought with their own money,” Buffett wrote. 

The comment comes after Abel acquired about $68 million of stock in the firm late last year, months after he sold his $870 million stake in Berkshire Hathaway Energy. Abel’s holdings had raised questions among investors about whether he had enough skin in the game compared to Buffett.

Read more: Buffett Successor Abel Buys $68 Million Berkshire Holding

The company also offered a rare shred of earnings guidance. Auto-insurer Geico reported a full-year underwriting loss of almost $1.9 billion as inflation ate into margins alongside elevated claim frequency and severity. The company said Geico has been able to secure premium rate increases and that it expects to return to operating profitability in 2023. 

Capital Allocation

The results also showed that Berkshire was a net seller of stocks in that period, which became evident after the company’s 13F filing indicated it had abruptly slashed a position in Taiwan Semiconductor Manufacturing Co. disclosed in the prior filing.

What Bloomberg Intelligence says:

Warren Buffett was bearish on stocks in 4Q, selling over $14 billion in equities. This was more than we calculated from the recent 13F filing, meaning the company’s timing on some sales was likely good.Matthew Palazola, senior industry analyst, insuranceBerkshire reported it had $128.6 billion of cash on hand at the end of last year, the ninth-largest stockpile in data going back to 2014. Buffett emphasized that he would keep maintaining that financial bulwark.

“As for the future, Berkshire will always hold a boatload of cash and US Treasury bills along with a wide array of businesses,” Buffett wrote. “We will also avoid behavior that could result in any uncomfortable cash needs at inconvenient times, including financial panics and unprecedented insurance losses.”