Good news for any shareholders of Berkshire Hathaway Inc. (BRK.A, BRK.B) — the Warren Buffett-led conglomerate posted a hefty 32% improvement in its Q4 earnings. On the other hand, current owners of BRK.B stock may not want to start too much of a party. Those numbers were up against a relatively tepid Q4 2014 comparison, and “getting back on track” mathematically looked more heroic than it actually was.
Of course, of all the numbers posted of BRK.A and its little brother version BRK.B, Buffett thinks earnings are the least important. Of much greater importance to him is the book value of Berkshire Hathaway stock, which was up 6.4% last quarter on a year-over-year basis.
Do the results and current valuation make BRK.B and its ungodly expensive counterpart, BRK.A, a buy? More important, were there any showstoppers in the well-loved annual letter to shareholders (and anything else) from Buffet?
The answers are maybe and no, respectively.
BRK.A and BRK.B Earnings
For the fourth quarter of 2015, Berkshire Hathaway earned $5.48 billion, versus $4.16 billion in the same quarter a year earlier. On a per-share basis for class A shares, the company earned $3,333 during the fourth quarter, compared to $2,529 per share a year earlier. For BRK.B, per-share income rolled in at $1.90 per share, up from $1.61 per share in the fourth quarter of 2014.
Those are nice numbers, but a tad incomplete. The reported income of $1.61 per share for BRK.B in Q4 2014 was only up about 5% from Q4 2013’s bottom line of $1.53 per share. For BRK.A, per-share operating profits were only up 5% in Q4 2015; the company earned $2,297 per share in the fourth quarter of 2014. The source of Berkshire’s poor performance in the fourth quarter of 2014 was its weak investment income with its insurance properties — arguably the most important aspect of the holding company’s core components.
Either way, the book value per share grew 6.4% in 2015, reaching $155,501 per class A share of Berkshire Hathaway stock. It’s currently valued at $200,539.31, or 129% of its justifiable book value. The disparity implies a premium price, and in some regards it is. The book value is generally understated, however. To that end, Buffett and Berkshire’s board have said they’ll start buying BRK.A and BRK.B shares if the stocks’ price fall to only 120% of their book values.
Bottom line? More of the same cash-driving-intensive success from Berkshire Hathaway.
Warren Buffett’s Letter to Shareholders
As interesting as the results from the legendary investor are, they don’t hold a candle to the annual shareholder letters penned with the release of Berkshire’s full-year numbers.
However, when all is said and done, very little of his comments mean much for the average shareholder (and even less for the non-shareholder), investors as well as the media love to scour past the thoughts that aren’t almost boilerplate and glean something useful.
The only truly new and truly interesting item was this snippet:
“There is, however, one clear, present and enduring danger to Berkshire against which Charlie and I are powerless. That threat to Berkshire is also the major threat our citizenry faces: a “successful” (as defined by the aggressor) cyber, biological, nuclear or chemical attack on the United States. That is a risk Berkshire shares with all of American business. The probability of such mass destruction in any given year is likely very small. It’s been more than 70 years since I delivered a Washington Post newspaper headlining the fact that the United States had dropped the first atomic bomb. Subsequently, we’ve had a few close calls but avoided catastrophic destruction. We can thank our government – and luck! – for this result. Nevertheless, what’s a small probability in a short period approaches certainty in the longer run. (If there is only one chance in thirty of an event occurring in a given year, the likelihood of it occurring at least once in a century is 96.6%.) The added bad news is that there will forever be people and organizations and perhaps even nations that would like to inflict maximum damage on our country. Their means of doing so have increased exponentially during my lifetime. ‘Innovation’ has its dark side.”
Buffett is also concerned about the impact the world’s industries and consumption is having on the environment:
“Up to now, climate change has not produced more frequent nor more costly hurricanes nor other weather-related events covered by insurance. As a consequence, U.S. super-cat rates have fallen steadily in recent years, which is why we have backed away from that business. If super-cats become costlier and more frequent, the likely – though far from certain – effect on Berkshire’s insurance business would be to make it larger and more profitable. As a citizen, you may understandably find climate change keeping you up nights. As a homeowner in a low-lying area, you may wish to consider moving. But when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries.”
Though Buffett hasn’t bought any companies specifically built to address the growing demand for cybersecurity and the need for clean, green-friendly businesses, considering he’s arguably the world’s wisest trend-spotter (he’s not called the Oracle of Omaha for nothin’), it’s a prognostication investors may want to take to heart.
The bottom line for BRK.A and BRK.B:
There’s still nothing sexy about Berkshire Hathaway, and there likely never will be. But, it remains a bright spot in a sea of often fruitless stock trading that most participants like to call “investing.”
There are no highfliers in his portfolio. No cures for cancer. No tech stocks that promise to revolutionize the way we interact with the world — just good cash flow. But, it works, and it works well.
There still aren’t too many portfolios that wouldn’t be better off without a little Berkshire Hathaway stock in it.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
