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The Berkshire Beat: August 4, 2023
All of the latest Berkshire Hathaway news — including a preview of Q2 earnings — and my must-reads of the week!
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The latest news and notes out of Omaha…
July was a quiet month on the Berkshire Hathaway front. Thankfully, August promises to be much more eventful. The fun kicks off tomorrow morning when Berkshire releases its Q2 2023 earnings report. Set your alarm clock for 8 a.m. ET!
On Thursday, Warren Buffett waved off any worries over Fitch’s downgrade of the U.S. credit rating. “There are some things people shouldn’t worry about,” he told CNBC’s Becky Quick. “This is one [of them].”
More from Buffett: “Berkshire bought $10 billion in U.S. Treasurys last Monday. We bought $10 billion in Treasurys this Monday. And the only question for next Monday is whether we buy $10 billion in 3-month or 6-month [T-bills].”
As expected, Occidental Petroleum’s profit dropped in the second quarter due to slumping oil and gas prices — but I’m not sure anyone was expecting it to come in 83% lower than a year ago. (This surprise to the downside is partially explained by Oxy writing off $164 million of assets in Wyoming’s Powder River Basin.)
A little optimism: Oxy raised its full-year production guidance with the expectation of “a strong second half of 2023”.
In Q2, Oxy repurchased $425 million worth of its common stock. That boosts Berkshire’s ownership stake in the oil-and-gas giant up to 25.3%. Oxy also redeemed $522 million of its preferred shares, bringing year-to-date redemptions to approximately 12% of the total. As of June 30, 2023, Berkshire still holds 88,312 of these high-yielding preferreds.
On Tuesday, Oxy and ADNOC (wholly owned by the Emirate of Abu Dhabi) agreed to “evaluate investment opportunities in Direct Air Capture facilities in the United States and the United Arab Emirates”. No firm commitments from either side, but perhaps the start of an intriguing strategic collaboration.
From the press release: “The DAC plant being evaluated by the companies in the UAE, if built, would use the same technology [as STRATOS in Texas] and could be the first megaton-scale facility of its kind outside of the U.S.”
Bank of America is the second-largest holding in Berkshire’s massive stock portfolio, so I like to keep tabs on what CEO Brian Moynihan has to say. And, last week, he hopped on Fox Business and weighed in on several hot topics.
On a potential recession: “That recession prediction keeps moving out [further into the future]. The power of the consumer, the power of the American economy, good businesses doing good things — that’s keeping the economy going.” (Moynihan says a “slight recession” is still possible.)
On competing with China: “We have a great company. We’ll beat anybody. We have talent and our people are terrific. They’re going to win. But, at the end of the day, it’s better for this country if the rules are more consistent because the talent and ingenuity and capabilities of our companies — with our banks helping them — can win in the world.”
On artificial intelligence: “We started on [Erica, our AI-powered virtual financial assistant] eight years ago. It now has 150-160 million [interactions] a quarter. Each of those would have been a phone call or a branch visit … Customer satisfaction of [Erica] is huge.”
Ever since writing Nick & Zak’s Terminal Portfolio, I’ve had Costco on my mind. If you ran out and bought $1,000 of COST 0.00%↑ stock after hearing that Charlie Munger was joining the company’s board of directors in January 1997, you would now have $65,600 (assuming dividends were reinvested). That’s good for a sizzling 17% annual return. Over this same period, the S&P 500 only returned 8.75% annually.
Another interesting tidbit: Susan Decker, who serves as the lead independent director at Berkshire, also sits on the Costco board.
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In the Spotlight: Previewing Berkshire Hathaway’s Q2 2023 Earnings
Tomorrow morning — at about 8 a.m. ET — Berkshire Hathaway will release its Q2 2023 earnings report on the company’s charmingly-spartan website.
I will cover the results in depth on Monday, but here are the three big questions on my mind as we await Berkshire’s quarterly results…
(1) Did Warren Buffett put the brakes on buybacks?
In Q1 2023, Berkshire bought back $4.4 billion worth of its own stock. That’s not only the highest amount spent on repurchases since Q4 2021, but the $3.4 billion in March alone was more than any whole quarter in 2022. As such, Class A equivalents dropped from 1,459,733 to 1,450,152 in the quarter.
The price of Berkshire stock, though, has changed in a big way since March. In fact, since bottoming out on March 17, both Class A and Class B shares are up about 20%. One might assume that such a jump in price would have some (negative) effect on Buffett’s willingness to repurchase shares.
Plus, we already know that the pace of buybacks slowed in April. When Berkshire released its Q1 earnings on annual meeting weekend, it provided an updated share count of 1,449,829 Class A equivalents still outstanding. That means Buffett bought back 323 more Class A equivalents between March 31 and April 25. (I believenoticed this first.)
(2) What about GEICO?
Beleaguered ol’ GEICO was the surprise star of Q1 — posting a $703 million underwriting profit after six consecutive quarters in the red.
The company elected to trade growth for profit — with policies-in-force actually declining in the quarter — culminating in a laudable 92.7% combined ratio. That’s a pretty remarkable turnaround considering GEICO posted a ghastly 93.1% loss ratio (which is just one component of the combined ratio) in 2022.
Nevertheless, Ajit Jain cautioned that GEICO’s combined ratio for the full year would likely come in “just south of 100%” — so we should expect some backsliding in Q2, Q3, and/or Q4.
(3) Will operating earnings decline after a solid first quarter?
While Berkshire reported an impressive 12.6% gain in operating earnings during the first quarter, Buffett struck an ominous note when discussing his outlook for the rest of 2023. “Perhaps the majority of our businesses will actually report lower earnings this year than last year,” he said.
It wasn’t all doom and gloom, though. “I would expect — but I can’t promise — that our operating earnings will be greater [in 2023] than last year,” Buffett added.
His cautious optimism mostly stems from the rising tide of insurance underwriting and the improving fortunes of short-term Treasury bills in our brave new 5+% interest rate world. Berkshire’s other subsidiaries, though, might be in for a slowdown.
We’ll find out tomorrow.
Other awesome things that I read this week…
“A good business will have pricing power. Even if earnings take a hit in the short term, they will make it back, and usually, they will more than make it back. Recession? A good business is not going to go kaput just because the economy weakens a little, or a lot. In fact, they will take advantage of the situation and maybe buy out competitors at very low prices … Munger often reminds us, this is how Carnegie, Rockefeller, and all those guys got rich; they just operated their business well, when the economy got bad, they just bought up their weakened competitors. Rinse, repeat over decades.”
Ben Graham’s (Not So) Marvelous Father (Beyond Ben Graham)
“Ben Graham renounced his father’s propensity to threaten his sons and mock other people, choosing instead ‘to take care never to wound others’ and to treat everyone — including his children, students, and employees (as Warren Buffett attested) — with kindness and respect. How remarkable that Ben Graham managed to emulate his father’s noblest quality, master his father’s art of recitation, and counter his father’s verbal cruelty with gentleness and decency.”
“The concept of the shadow is central to [Carl] Jung’s work. This is the neglected or disowned part of our psyches. If we can reintegrate the shadow side of the Western mind, reason, we might be whole again. Our fall was caused by the rational intellect rejecting its source, it might also be healed by its return. Kingsley quotes a line from the Grail legend: “The wound is only healed by the lance that made it.” We can flip our left-hemispheric gifts back in service of the right. This will mean rebuilding the road back to meaning through science and technology.”
“How do we avoid becoming dull, dim, and lifeless? By entering our maze. By facing what we are avoiding, what has been staring us in the face. By embarking on our adventure. By refusing to sacrifice our time and potential. I don’t know what maze you face, what monsters may be hiding in it, or what the right path may be for you … But I believe if you want to find the truth about yourself and discover the treasure of your own potential, you must enter.”