Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) recently reported results for the third quarter of fiscal 2019. For the quarter and year to date, operating earnings were $7.9 billion (up 14%) and $19.6 billion (up 3%), respectively. Notably, these results exclude significant unrealized gains from investments and derivatives, which GAAP now requires to flow through the income statement. To put numbers on it, we’re talking about more than $30 billion through the first nine months of 2019.
The year to date growth in operating earnings reflects broad gains across the company, most notably at Burlington Northern Santa Fe (pre-tax income up 7% year over year to $5.4 billion).
Float at quarter-end was $127 billion, an increase of 4% since the start of the year. Over the past five, 10 and 20 years, the annualized growth rate for float has been quite consistent at up 8% to 9% per annum (ever since Warren Buffett (Trades, Portfolio) wrote in his 2016 shareholder letter that "we may in time experience a decline in float", it has increased by roughly 40%). Berkshire has generated this growth while simultaneously reporting sizable underwriting gains: over the past 16 years, the company’s pre-tax underwriting gain has totaled $27 billion (an average of $1.7 billion per year). Through the first nine months of 2019, the insurance businesses have generated a pre-tax underwriting gain of roughly $1.5 billion.
The underwriting gains were once again led by GEICO. The business is seeing continued growth and market share gains, with earned premiums up 7% through the first nine months of the year. The year-to-date combined ratio has slightly worsened (up 220 basis points to 94.2%), which reflects continued increases in loss severities. As a result, underwriting earnings at GEICO through the first nine months of 2019 have declined by roughly 20% to $1.5 billion. The other insurance segments - Berkshire Hathaway Reinsurance Group and Berkshire Hathaway Primary Group - reported lower year-over-year underwriting results as well, but part of this is self-inflicted from things such as retroactive reinsurance contracts. This was offset by investment income, which has increased 21% year to date with help from higher short-term interest rates and growth in dividend income.
Revenues at Burlington Northern Santa Fe (BNSF) were roughly flat through the first nine months of the year, which reflects headwinds in the coal business. Despite facing some headwinds from adverse weather like flooding, which materially impacted the network, the operating ratio has declined by 130 basis points to 65.7% (adjusted for the $120 million curtailment gain). As a result, earnings have increased by a mid-single digit percentage year to date. All that said, it is interesting that BNSF’s operating ratio still trails Union Pacific (UNP, Financial) by a wide margin.
Berkshire Hathaway Energy (BHE) reported a 1% increase in year-to-date revenues to $15.4 billion, with pre-tax earnings coming in roughly flat year over year at $2.2 billion. The segment continues to see material bottom line benefits in wind-powered electricity production tax credits, with an effective tax rate to date of negative 21%. As a result, net income at BH Energy through the third quarter was up 6% year over year to $2.4 billion.
Manufacturing, Service and Retailing (MSR) revenues have increased 1% year to date to $106.3 billion, driven by growth at subsidiaries like Precision Castparts (PCC), Marmon, Clayton Homes and Berkshire Hathaway Automotive. Earnings have increased at a comparable rate to $9.4 billion.
Through the first nine months of the year, Berkshire has generated $26.6 billion in cash flow from operations (flat year over year). Over the same period, Berkshire has spent $8 billion on net equity purchases, $11.1 billion on capital expenditures and $2.8 billion on share repurchases, with the diluted share count down 0.6% year over year. The net result was another increase in Berkshire’s dry powder, with $128 billion in cash and equivalents on the books at quarter end.
Digging deeper on the repurchases, we’re starting to get a feel for how aggressive Buffett and Charlie Munger (Trades, Portfolio) are willing to be. Specifically, based on the disclosures in the quarterly filing, we can see that the majority of Berkshire’s repurchase activity in the third quarter (approximately 80%) was completed in August. Those repurchases were at an average price of roughly $198 per share, despite the stock only trading below $200 for two or three weeks during the quarter. That suggests to me that, in their eyes, it only makes sense to start getting more aggressive on the buyback when the stock falls near those levels. Note that this aligns with the activity we saw earlier in the year: in the first quarter, when Berkshire repurchased $1.7 billion of stock, the average price was right around $201 per share. Considering what they’ve told shareholders in the past, I don’t find this result particularly surprising: with book value currently at $163 per “B” share, that puts repurchases at right around 1.2 times book (remember that for several years Berkshire had a common stock repurchase program that permitted management to repurchase shares at prices no higher than a 20% premium over book value).
Despite the significant amount of dry powder that has been accumulated on the balance sheet, I continue to be confident that Berkshire will eventually find a way to quickly and intelligently allocate tens of billions of dollars at an opportune time. Remember, Berkshire spent $16 billion during a three week period in 2008. Until then, let’s hope they can find an occasional deal like the $10 billion investment recently closed with Occidental Petroleum (OXY, Financial).
As a shareholder, I continue to be confident in the collection of businesses I own, as well as the people running them and the individual allocating excess capital at headquarters. Berkshire Hathaway will continue to be a large holding in my portfolio.
Disclosure: Long Berkshire Hathaway.
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