Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) reported its third-quarter earnings over the weekend. The results were a bit of a mixed bag, depending on what one is looking for from the company.
Overall, operating profits increased by 18%, and the sprawling conglomerate ended the third quarter with a record amount of cash on the balance sheet. At the end of September, Berkshire's cash pile amounted to $149.2 billion. At the end of the second quarter, cash had totaled $144.1 billion.
The conglomerate's cash pile has been growing even though it has been spending ever-increasing amounts purchasing its own shares. In the third quarter, the company repurchased $7.6 billion of its own stock, bringing the nine-month total to $20.2 billion. Last year, Berkshire spent a total of $24.7 billion on repurchases.
The biggest position
When combined, these figures suggest that Warren Buffett (Trades, Portfolio) has spent more of his and Berkshire investors' cash repurchasing the company's own shares over the past two years than he has on any other investment. With nearly $50 billion deployed since the beginning of 2020 (the conglomerate has repurchased an estimated $2 billion more since the end of the third quarter, putting it on track for $25 billion for the whole year), the volume of cash deployed exceeds most of Berkshire's large equity investments.
The largest holding in Berkshire's equity investment portfolio at the end of June 2021 was Apple (AAPL, Financial). This position made up 42% of the equity portfolio and was worth $122 billion at the end of the second quarter. The second-largest holding was Bank of America (BAC, Financial), worth just under $42 billion.
Interestingly, Buffett paid in the region of $46 billion for his stake in Apple in the first place. This suggests he has now spent more buying back Berkshire's own shares than he has on any equity investment ever.
Considering the fact that the group has continued to repurchase its own shares since the end of September and the enormous cash pile, I do not think it is unreasonable to expect that this trend will continue. Over the past couple of years, share repurchases have started to make a significant impact on the number of Berkshire's shares outstanding.
Undervalued
In the first quarter of 2018, Berkshire had an average of 1,644,958 Class A Shares outstanding and 2,467,436,888 Class B Shares. By the end of the third quarter of 2021, the figures were 1,503,013 and 2,254,518,838, respectively.
Based on these numbers, since the beginning of 2018, the number of Class A Shares outstanding has decreased by 8.6%. The number of Class B Shares has declined by a similar amount.
To put these numbers into perspective, since the beginning of 2018, Berkshire's Class B Shares have added just under 37%. Book value has increased around 34%. Book value per share is up 46%. These are only rough, back-of-the-envelope figures, but they do appear to show that the market is not appreciating the growth of the underlying business.
The Oracle of Omaha continues to deploy significant amounts of capital repurchasing his corporation's shares. As the business has grown over the past few years, the market has seemingly overlooked this growth in favor of the equity portfolio. As this trend continues, Berkshire is only becoming cheaper.
Looking through the company's latest 10-Q, one can get some idea of the level at which Buffett thinks the stock looks cheap and is worth repurchasing. According to the report, the highest price Berkshire paid in any month was $285.40 on average for the B Shares in the month of August.
As an average, this figure tells us that the group was paying over the average figure and below it. In September, Berkshire repurchased nearly a third more shares than it did in July and August, at an average price of $277.74.
