Source: Barron's
Author: Andrew Barry
Buffett has left Berkshire Hathaway in excellent shape for his successor.
Warren Buffett is poised to step down at a high point in performance.
$Berkshire Hathaway-B (BRK.B.US)$ The company reported robust third-quarter earnings on Saturday, with its vast cash reserves reaching a new record high.
This will provide a solid foundation for Greg Abel, the Berkshire executive who will succeed the 95-year-old Buffett as CEO by the end of the year, leading the world's largest conglomerate with a market value of USD 1 trillion.
Berkshire Hathaway’s after-tax operating profit surged 33% year-over-year in the third quarter to USD 13.5 billion. Its cash and equivalents holdings increased to USD 381 billion by the end of the quarter, up from USD 344 billion as of June 30.
However, the actual performance behind these figures is not as impressive as it appears on the surface.
Excluding profit fluctuations related to exchange rates, Berkshire's operating profit grew 17% year-over-year to USD 13.2 billion, with earnings per share exceeding market expectations by approximately 7%. Additionally, over USD 20 billion in Treasury bond purchases were influenced by timing effects. After accounting for this factor, Berkshire’s cash balance stood at about USD 359 billion, providing Abel with ample funds for future investments and potential acquisitions.
"Overall performance was solid, with particularly strong results in the insurance business," said Jim Shanahan, an analyst at Edward Jones, a well-known U.S. financial services company.
However, investors may be disappointed that Berkshire did not repurchase shares in the third quarter—a trend that has persisted since May 2024. Although Berkshire's share price has fallen more than 10% from its peak before the annual shareholders' meeting on May 3—when Buffett announced he would step down as CEO by the end of the year but remain as chairman—Buffett clearly believes the current stock price is not cheap enough to warrant buybacks.
Since the May 3 meeting, Berkshire's stock performance has lagged$S&P 500 Index (.SPX.US)$by over 30 percentage points—one of the worst periods in Buffett’s six-decade tenure as CEO.
Currently, Berkshire trades at 1.5 times book value, down from 1.8 times at its May high, placing it at a more reasonable level.
In the third quarter, underwriting profits in the insurance business performed strongly, driven by Geico’s sustained high margins and the absence of major hurricanes in the U.S. during the same period. Profits at BNSF, Berkshire’s railway subsidiary, rose by 5% year-over-year.
On the negative side, investment income fell by 13% due to declining short-term interest rates, while profits at Berkshire Hathaway Energy (BHE) dropped by 9% year-over-year.
BHE has long benefited from U.S. federal tax credits for wind energy, with one of the largest portfolios of wind assets nationwide. However, the company stated that the 'Big and Beautiful Act,' passed earlier this year, reduced these tax incentives, potentially impacting performance negatively.
In its quarterly report (10-Q) released this Saturday, Berkshire stated: "We are currently evaluating the potential impact of the 'Big and Beautiful Act' on BHE’s financial performance, as well as its implications for capital expenditures related to renewable energy, energy storage, and technology-neutral projects, including effects on the economic feasibility and viability of such projects."
Berkshire Hathaway's consumer businesses showed some signs of weakness; Pilot Travel Centers, a truck stop operator acquired by Berkshire, unexpectedly reported a loss of $170 million in the third quarter, compared to a profit of $2.17 billion in the same period last year. Berkshire paid approximately $13 billion for the acquisition of the company.
There are also indications that Berkshire reduced its holdings in Apple stock during the third quarter. According to estimates by Barron's, Berkshire may have sold around 30 million shares of Apple during this period, reducing its stake to 250 million shares, valued at approximately $67 billion. Berkshire will disclose its holdings in Apple and other positions in its roughly $300 billion stock portfolio in mid-November.
Warren Buffett, along with his investment managers Todd Combs and Ted Weschler, continued to struggle to find attractive buying opportunities in the stock market during the third quarter. The net selling of stocks (sales minus purchases) for the quarter amounted to approximately $6 billion, bringing the total net selling for the year to about $10 billion. Purchases for the quarter totaled only $6.4 billion.
"It is disappointing that Buffett remains on the sidelines. He has missed the stock market rebound while hoarding cash," said Shanahan. However, in October, Berkshire agreed to acquire$Occidental Petroleum (OXY.US)$the chemical business for nearly $10 billion, a deal that appears quite attractive.
So what are the prospects for Berkshire’s stock?
Shanahan is optimistic. In September, he upgraded the stock from "Hold" to "Buy" and added it to Edward Jones' focus list. As the 'Buffett premium' gradually fades, coupled with investor concerns over insurance profitability and potential declines in investment income by 2026, the stock has been on a downward trend over the past six months.
The most critical question going forward will rest on Abel—his leadership ability, and whether he can successfully take over Buffett's responsibilities. On this point, Shanahan remains optimistic.
"Abel is likely to demonstrate strong operational capabilities," said Shanahan. "I also see defensive characteristics in this stock as a positive factor."
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