Berkshire Hathaway Q1 Earnings: Strong Performance With A … – Seeking Alpha

Berkshire Hathaway (NYSE:BRK.B) released its first quarter earnings today. The release beat expectations on both revenue and earnings, GAAP earnings in particular being 364% ahead of estimates. Operating earnings–the metric that Warren Buffett and Charlie Munger consider most appropriate–grew by 12%. These were solid results by any standard, both ahead of expectations and growing.

Shortly after Berkshire’s Q1 earnings were released, the company’s annual meeting got underway in Omaha, Nebraska. The meeting was quite well publicized, generating a flurry of posts on Twitter and elsewhere, minting brand new Buffett and Munger quotes in the process. Especially noteworthy at the meeting were the “available for sale” and “held to maturity” placards Buffett and Munger put in front of themselves–an apparent reference to the recent banking panic.

Personally, I was satisfied with the results Berkshire put out. The release beat analyst estimates and delivered positive earnings growth. As we saw from big tech earnings releases last week, that latter standard is not easy for companies to hit in 2023. Although most U.S. tech giants beat and saw their shares rise in the markets after their releases came out, only a couple actually managed positive growth. So, Berkshire stood out compared to many of the companies releasing earnings at the same time as it did.

As I’ve written in past articles, I like Berkshire Hathaway stock for several reasons. First, Warren Buffett and Charlie Munger are legends, having delivered one of the best investment track records of all time. Second, Berkshire’s valuation is not extreme, being valued similarly to the average S&P 500 stock. Third, the company has a truly world class lineup of lieutenants set to take over after Buffett and Munger depart, as I mentioned in the Tweet below:

Berkshire Hathaway has one of the best track records in corporate America. There are a handful of larger companies, and there are older companies, but there are few companies that have been around as long as Berkshire that have compounded as consistently. In this article I’ll explain why I consider Berkshire Hathaway stock a buy following its first quarter earnings releases, and why I’ll likely hold it through many future earnings releases and other major events.

Earnings Recap

Berkshire Hathaway’s most recent quarterly release beat analyst estimates on both the top and bottom lines, boasting metrics like:

• $85.93 billion in revenue, up 21% year-over-year, a beat.

• $8.065 billion in operating earnings, up 12%, a beat.

• $35.7 billion in net income, a beat.

• $16.25 in GAAP EPS, a beat.

These earnings metrics were all well ahead of average. GAAP EPS, in particular, was 364% ahead of analyst estimates. It’s possible that some analysts have taken Buffett’s words to heart, and are using operating earnings as their “EPS” metric. If that’s the case then, with 2.184 billion ‘B’ shares outstanding, EPS was $3.69, which was also ahead of the $3.50 estimate. Especially noteworthy in the release was $4.4 billion worth of buybacks, which helped propel EPS slightly higher, and showed management’s commitment to returning value to shareholders.

In any case, the quarter was impressive. Not only did all relevant metrics beat analyst expectations, but underwriting earnings rose from $167 million to $911 million. These are results any investor would be proud to see their companies putting out. And as I’ll show in the next section, there is good reason to think that they could continue.

Competitive Landscape

It’s one thing to say that a company put a good quarter behind it, but quite another thing to say that it will continue. Seeing a company put out a good quarterly release and then running out and buying its stock without considering anything else is one of the classic ways that people go broke in stocks. We need to know reasons why the good results can be expected to continue. In doing so, we should consider Warren Buffett’s own preferred metric for evaluating a company’s prospects:

Its competitive position.

Any company can stumble into a growing industry, but if too many competitors rush in, its margins will get whittled away to nothing. In order for a company to thrive long term, it needs a durable competitive advantage. Berkshire Hathaway has one:

Its management team.

Warren Buffett and Charlie Munger are legends in the world of investing, having booked 19.8% CAGR returns over a full 60 years. There are dozens of investment managers out there who have returned 20% CAGR, but none over such a long time period, and with the earnings continuing to compound at “Berkshire-like scale.” The results speak for themselves.

Berkshire Hathaway’s management philosophy is difficult to replicate. Buffett and Munger have an advantage over many money managers who run funds because they aren’t subject to performance targets. Many funds have hurdle rates that must be hit before managers get the juicy performance fee, Berkshire’s management are paid primarily by how well Berkshire’s stock does. A fund manager may pursue excessively risky strategies hoping to hit their hurdle rate and go broke doing so; Berkshire’s team has no such incentives. So, they are structurally set up to think about the long term rather than the short term.

Berkshire Hathaway has a number of other advantages as well, mostly stemming from the quality of its management team:

• High underwriting standards. Berkshire incentivizes the insurance team to write good policies, rather than as many policies as possible regardless of the quality. As a result, Berkshire’s insurance business faces relatively few extreme claim events that risk tanking the company.

• An AA+ credit rating from Standard and Poor’s; similarly good ratings from other agencies.

• A large number of private companies that actively want to sell to Berkshire Hathaway, owing to its sterling reputation.

• A $130 billion cash hoard that can be used to pass down money to individual subsidiaries facing trouble.

There are few companies with as much cash as Berkshire Hathaway, and almost none with as good a track record of long term investment management. If the upcoming managers are as good as the previous ones, then Berkshire’s stock will probably keep rising.

Valuation

Having looked at Berkshire’s recent earnings and its competitive position, we can now turn to its valuation. Berkshire Hathaway’s EBIT for the four most recent quarters was:

• Q1 2023: $8.065 billion ($3.69 per share).

• Q4 2022: $6.7 billion ($3.05 per share).

• Q3 2022: $7.7 billion ($3.5 per share).

• Q2 2022: $9.2 billion ($4.18 per share).

So, we’ve got $14.42 in EBIT per share in the ttm period, and a $323 stock price. That yields an EBIT P/E ratio of 22.46–not cheap but not expensive either.

I made a point of calculating this “EBIT P/E” ratio by hand out of respect for Buffett and Munger’s wishes. The duo is known for believing that GAAP EPS isn’t accurate for companies that own large amounts of stock, and I think they’re right about that. So, I went with the “Buffett method” for the P/E ratio. As for the other multiples, those are a bit more straightforward, so I’ll just relay what Seeking Alpha Quant has on file:

• Price/sales: 2.39.

• Price/book: 1.52.

• Price/cash flow: 19.24.

Certainly not a bargain bin deal here, but not the most expensive stock by any stretch of the imagination. According to YCharts, the S&P 500 is at 22.2 times earnings, so Berkshire is about average.

The Big Risk to Keep in Mind

As we’ve seen, Berkshire Hathaway has a great management team, is putting out good earnings, has a durable competitive advantage, and isn’t even all that pricey. It looks like a deal. However, no investment is without its risk, and Berkshire Hathaway has one big one worth noting:

Succession. Buffett and Munger probably won’t be running Berkshire much longer, and Greg Abel has been tapped to replace Buffett. He is primarily involved in the non-insurance side of Berkshire’s business, meaning he deals with individual companies rather than stock picking. Much of the stock-picking at Berkshire is done with GEICO’s float. Abel has helped negotiate some great deals for Berkshire, but it’s not clear from his background that he’d be a superstar stock picker like Warren Buffett. Perhaps the reason Berkshire hired Todd and Ted was to make sure there’d be somebody good at handling equity investments, rather than leaving all of it to Greg.

At any rate, I’m happy owning Berkshire Hathaway stock now, and I’ll be happy holding it for the foreseeable future. Well managed, cash-flush, and with competent successors waiting in the wings, it has stood the test of time.