Warren Buffett is betting on brighter prospects for his Berkshire Hathaway Inc.
Berkshire spent a record $5.1bn buying back its own stock in the second quarter, and may have kept that higher pace going in July. The billionaire investor sought to seize on a bigger discount to the S&P 500 during a quarter when the conglomerate’s operating businesses held up better than expected.
Buffett said in early May that he was keeping cash high to be prepared for any direction the pandemic might turn and wasn’t overly attracted to buybacks. But as he searched for undervalued assets to spend billions on, he gravitated to his own firm’s shares.
“Even though we don’t know how long it’s going to be and how much it’s going to permanently affect people’s behaviour, we think Berkshire Hathaway is in a really good position to survive,” said Bill Smead, chief investment officer at Smead Capital Management, which oversees $1.5bn including Berkshire shares.
Edward Jones analyst Jim Shanahan estimated that Berkshire repurchased about $2.4bn more of its stock in July.
The 10% drop in operating profit wasn’t nearly as precipitous as the 27% decline expected by analysts at Keefe, Bruyette & Woods, and results were better than a forecast from Shanahan. Earnings generated by Berkshire’s businesses topped $5bn for the ninth time in the last 10 quarters.
Buffett piled into his firm’s stock as Class A shares fell 1.7% and Class B shares were down 2.4% in the second quarter. He wasn’t as bullish on broader equities as the S&P 500 rallied 20%. Berkshire had its biggest net sales of stocks in more than a decade.
“Warren Buffett’s Berkshire Hathaway will see earnings challenged in 2H and needs a large deal to move the needle on results. A huge and growing cash pile mean big M&A and share buybacks are easily afforded, yet elevated values of companies with diminished earnings expectations and coronavirus uncertainty are impediments to deals,” said Matthew Palazola, senior industry analyst, and Derek Han, associate analyst, at Bloomberg.
Along with the buybacks, purchases of Bank of America Corp stock in recent weeks as well as a July deal for natural-gas assets signal that Buffett isn’t just waiting on the sidelines anymore. He’s picking his spots: Bank of America is a longtime Berkshire investment and Buffett’s firm is very active in the energy sector.
“All of those are really things he’s comfortable with,” said Paul Lountzis, who oversees investments including Berkshire shares as president of Lountzis Asset Management. “I don’t think he’s stepping out of his comfort zone. He’s still trying to be very careful and very conservative.”
And with a record $146.6bn of cash on hand at the end of June, Berkshire said the company could weather the pandemic’s effects.
“Our operating business groups are preparing for reduced cash flows from reduced revenues and economic activity as a result of Covid-19,” Berkshire said on Saturday in a regulatory filing. “We currently believe our liquidity and capital strength, which is extremely strong, to be more than adequate.”
Here’s some other takeaways from Berkshire’s second-quarter earnings:
Berkshire sold almost $13bn in stocks, on a net basis, in the quarter. That included Buffett’s decision to dump airline stakes, which was announced at his annual meeting in May. Another chunk of the divestments appears to come from Berkshire’s bets on financials. Berkshire and other investment companies are expected to report their 13F holdings by August 14.
Berkshire continued to feel the pain of the airline industry upheaval, even after dumping its stock holdings in four of the major US airlines. Buffett’s company booked a $10bn impairment charge tied to its Precision Castparts business in the second quarter, and warned that it might take a vaccine to get that market back to more normal levels.
Operating profit slumped 10%, hit by lower earnings from the railroad BNSF and from Berkshire’s collection of manufacturing, service and retailing businesses.
The pandemic weighed on units ranging from Precision Castparts to the footwear and apparel businesses. Berkshire warned that the effects on most operations were “relatively minor to severe” and cautioned that it’s hard to predict when the environment will normalise or how this will alter consumer behavior going forward.
BNSF reported reduced revenues across the variety of goods it carries on its rails, including agricultural products, consumer items, industrial cargo and coal, but the business was able to eke out more cost savings in the quarter.
Net earnings surged nearly 87% in the second quarter, driven by swings in Berkshire’s $207bn stock portfolio. Unrealised gains in the stock holdings accounted for a $34.5bn gain.
Berkshire’s Apple Inc stake, its largest common stock bet, ended the quarter at $91.5bn, meaning it accounted for about 44% of the company’s stock portfolio.
Insurance underwriting profit more than doubled to $806mn in the period. That was helped by gains at auto insurer Geico as fewer accidents benefited the business. Berkshire warned that Geico might be hurt in the next three quarters by a program that’s giving drivers a credit on their premiums.
LEAVE A COMMENT Your email address will not be published. Required fields are marked*
QNB: Japan's "Abenomics" set to continue into the new political cycle
ECB’s Lagarde says business needs more women leaders
Trump to block US downloads of TikTok, WeChat tomorrow
Wall St struggles to keep up in China mutual fund boom
Indian equities end in the red; rupee rises
Hedge funds sidestep tech selloff, tilting towards value stocks
Asia markets mixed as stimulus row dents optimism
Currency that never gains gets Ghana central bank lifeline
LSE picks Euronext as preferred bidder for Borsa Italiana