Berkshire Hathaway Q3/2023 Earnings at a Glance

The Q3/2023 earnings were a wild rollercoaster ride for Berkshire Hathaway, with a significant net loss. But don't panic just yet. This legendary conglomerate, led by Warren Buffett, knows how to weather the storm. With a diverse portfolio and a long-term investment strategy, Berkshire Hathaway has a history of bouncing back. So, buckle up and trust in the company's ability to navigate the ups and downs of the business world. The road ahead looks promising.

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Introduction

Berkshire Hathaway, a multinational conglomerate holding company, is a titan in the global business landscape. With its diverse portfolio of businesses and investments, it has become a beacon of financial stability and investment prowess. Led by the legendary investor Warren Buffett, Berkshire Hathaway's business decisions and financial performance are closely watched by investors worldwide. This article will delve into the company's Q3/2023 earnings, providing a comprehensive analysis of its performance and its implications for shareholders.

The third quarter of 2023 was a rollercoaster ride for Berkshire Hathaway shareholders. The company reported a net loss attributable to shareholders of ($12,767) million. This marks a stark contrast to the same period in 2022, where the net loss was considerably lower at ($2,798) million ¹. However, it's crucial to remember that Berkshire Hathaway's financial health cannot be judged solely based on a single quarter's performance. The company's diverse portfolio and long-term investment strategy often result in fluctuations in quarterly earnings, but it's the overall trajectory that matters. Most importantly, operating earnings have been strongly positive.

Before the quarterly report BRK-B closed at $351.81 ². This corresponds to a market capitalization of roughly $760B as of November 3rd 2023. For a book value explanation see here.

Overview of Q3/2023 Earnings

The net loss of ($12,767) million in Q3/2023 was a significant decline from the net loss of ($2,798) million in Q3/2022. This drastic change can be attributed to various factors, including investment losses and changes in the performance of key business segments. However, it's important to note that despite this quarterly loss, Berkshire Hathaway's net earnings for the first nine months of 2023 were a whopping $58,649 million, a substantial increase from the net loss of ($40,839) million during the same period in 2022 ¹.

Please note that the net loss is largely due to losses in the investment portfolio. Operating earnings have been in excess of $10B ¹, see also table in the annex. We will go into details in our analysis of key business segments.

This stark contrast between the third-quarter loss and the nine-month earnings highlights the unpredictable nature of investment outcomes. It also underscores the importance of Berkshire Hathaway's diversified business model, which allows it to weather short-term financial storms ↗. As Warren Buffett famously said, "Our favorite holding period is forever." This long-term perspective is evident in Berkshire Hathaway's ability to rebound from quarterly losses and maintain overall profitability.

The company's resilience can be traced back to its history. Founded in 1839 as a textile manufacturing company, Berkshire Hathaway has transformed into a conglomerate with investments in various sectors, including insurance, utilities, rail transportation, and more. This diversification has allowed it to navigate economic downturns and market volatility successfully. The Q3/2023 earnings, despite being a loss, are a testament to this resilience and the company's ability to bounce back.

Analysis of Key Business Segments

Insurance Underwriting

One of the key drivers of Berkshire Hathaway's financial performance is its insurance underwriting business. In Q3/2023, this segment generated earnings of $2.4 billion, a significant improvement from the loss of $1.1 billion in Q3/2022. Furthermore, the earnings for the first nine months of 2023 were $4.6 billion, demonstrating the robust performance of this segment ¹.

Berkshire Hathaway's insurance operations have been a cornerstone of its business model. The company's insurance subsidiaries, including GEICO and Berkshire Hathaway Reinsurance Group, provide a steady stream of "float" – premiums collected before claims are paid – which can be invested for profit. The strong performance of the insurance underwriting business in 2023 indicates that this strategy continues to pay off.

BNSF

Berkshire Hathaway's BNSF Railway, one of the largest freight railroad networks in North America, experienced a decline in earnings in 2023 ↗. The earnings for Q3/2023 were $1,221 million, a decrease of 15.3% compared to the same period in 2022. Similarly, the earnings for the first nine months of 2023 were $3,732 million, marking a decline of 16.6% ¹.

The decline in BNSF's earnings can be attributed to various factors, including economic conditions, changes in freight demand, and operational challenges. However, despite the decline, BNSF remains a valuable asset for Berkshire Hathaway. Its extensive network and strong market position allow it to generate substantial cash flows, contributing to Berkshire Hathaway's overall financial health.

Berkshire Hathaway Energy (BHE)

Berkshire Hathaway Energy (BHE), another significant business segment, also experienced a decline in earnings in 2023. The after-tax earnings for Q3/2023 were $498 million, a decrease of 68.9% compared to Q3/2022. Similarly, the earnings for the first nine months of 2023 were $1,699 million, marking a decline of 46.3% ¹.

Despite the decline, BHE continues to be a crucial part of Berkshire Hathaway's portfolio. Its diverse mix of businesses, including utilities, natural gas pipelines, and renewable energy, provides a stable source of earnings and growth potential. The decline in earnings in 2023 can be seen as a temporary setback, and the long-term outlook for BHE remains positive.

Manufacturing, Service, and Retailing

Berkshire Hathaway's manufacturing, service, and retailing businesses showed a modest increase in earnings in 2023. The earnings for Q3/2023 were $3,341 million, an increase of 2.9% compared to Q3/2022. The earnings for the first nine months of 2023 were $9,712 million, marking an increase of 2.0% ¹.

These businesses, which include companies like Precision Castparts, Lubrizol, and Dairy Queen, are a significant part of Berkshire Hathaway's diversified portfolio. The modest growth in earnings in 2023 indicates that these businesses continue to perform well despite economic uncertainties and market volatility.

Investment and Derivative Contract Gains (Losses)

Berkshire Hathaway's investment and derivative contract gains (losses) for Q3/2023 were ($23,528) million, a significant loss compared to the same period in 2022. However, the gains for the first nine months of 2023 were $29,780 million, indicating a strong overall performance ¹.

These gains and losses predominantly derived from investments in equity securities and included significant net unrealized gains and losses from market price changes. This highlights the inherent risks and rewards associated with investment activities. While investments can generate substantial profits, they can also lead to significant losses due to market volatility.

Berkshire Hathaway's investment strategy, guided by Warren Buffett's principles of value investing, focuses on buying securities at prices below their intrinsic value. This strategy has proven successful over the long term, despite occasional short-term losses. The Q3/2023 loss can be seen as a temporary setback in the context of Berkshire Hathaway's overall investment performance.

Berkshire Hathaway's Stock Portfolio

Berkshire Hathaway sold over $5 billion of exposure to US and foreign stocks in Q3/2023, marking the fourth straight quarter of stock sales. These divestments, which included positions in companies like Chevron, General Motors, and Marsh & McLennan, as well as a stressed stock market led to a decline in the value of Berkshire Hathaway's stock portfolio to $319 billion from $353 billion at the end of June ³.

These stock sales can be seen as part of Berkshire Hathaway's strategy to manage its portfolio and reallocate resources based on market conditions and investment opportunities. Despite the decline in the portfolio's value, Berkshire Hathaway's stock holdings remain a significant source of wealth and potential future gains.

The decline in the broader market, influenced by factors such as economic uncertainties and expectations of higher interest rates, contributed to the decrease in valuations ↗. However, it's important to remember that market fluctuations are a normal part of investing, and Berkshire Hathaway's long-term investment strategy is designed to navigate these fluctuations.

Cash Holdings and Stock Repurchases

Berkshire Hathaway's cash pile reached a record $157.2 billion at the end of September 2023, up from $147.4 billion in the second quarter of the year ⁴. This substantial cash reserve provides the company with significant financial flexibility and the ability to seize investment opportunities as they arise.

In addition to its cash holdings, Berkshire Hathaway also repurchased $1.1 billion worth of its own stock in Q3/2023, bringing the nine-month total to approximately $7 billion in stock repurchases ⁴. These repurchases reflect the company's belief in its intrinsic value and its commitment to returning capital to shareholders.

Impact of Catastrophe Losses and Interest Income

Berkshire Hathaway's insurance operations experienced significant catastrophe losses in the first nine months of 2023. These losses were $590 million, a significant decrease from the $3.9 billion in losses during the same period in 2022 ³.

This decrease in catastrophe losses can be attributed to a variety of factors, including changes in weather patterns and the company's risk management strategies. Despite these losses, Berkshire Hathaway's insurance operations remain profitable, thanks in part to the rise in interest income on insurance investments, which climbed to $1.7 billion in Q3/2023 ³.

Berkshire Hathaway's Strategic Moves

In 2023, Berkshire Hathaway made several strategic moves that could have significant implications for its future performance. The company increased its ownership in Pilot Travel Centers (PTC) from 38.6% to 80% on January 31, 2023, and began consolidating PTC's results of operations on February 1, 2023 ¹.

This move reflects Berkshire Hathaway's confidence in PTC's business model and its potential for growth. The consolidation of PTC's results of operations could contribute to Berkshire Hathaway's earnings and provide additional diversification benefits.

Additionally, Berkshire Hathaway doubled down on its stakes in Japan's top five trading companies, taking its average stake in each company to above 8.5% ⁴. This investment underscores Berkshire Hathaway's belief in the long-term potential of these companies and its commitment to international diversification.

Conclusion: The Rollercoaster Ride for Shareholders of Berkshire Hathaway

The Q3/2023 earnings were indeed a rollercoaster ride for Berkshire Hathaway shareholders. The company reported a significant net loss, marking a stark contrast to the net earnings for the first nine months of 2023. However, the company's diverse portfolio and long-term investment strategy provide a buffer against short-term fluctuations and contribute to its overall financial health.

Looking ahead, Berkshire Hathaway's future outlook remains positive. The company's substantial cash reserves, robust business operations, and strategic investments position it well for future growth. As Warren Buffett once said, "In the business world, the rearview mirror is always clearer than the windshield." While the Q3/2023 earnings were a setback, Berkshire Hathaway's history of resilience and its forward-looking strategy suggest a promising road ahead.

In conclusion, the rollercoaster ride of Q3/2023 earnings underscores the inherent uncertainties in the business world. Yet, for Berkshire Hathaway, with its diverse portfolio and legendary leadership, these challenges are but temporary hurdles on the path to long-term success. As shareholders, it's crucial to maintain a long-term perspective and trust in the company's ability to navigate the ups and downs of the business landscape.

Annex: Berkshire Operating Earnings Q3/2023 ¹

Note: numbers in millions.

References