Berkshire surprised with record buybacks, but pace slowed as the stock rose

Summary

Also noteworthy from the company's third-quarter results were big revenue and earnings gains for the company's railroad unit, BNSF, and a drop in profits for its huge insurance group.

Berkshire Hathaway's record stock repurchases were the highlight of the company's third-quarter results, but the company became less aggressive in October as the share price went up.

The company's operating earnings of $13 billion after taxes -- adjusting for one-time, noncash currency losses -- were down less than 1% year over year, Barron's calculates. Those results were somewhat better than Wall Street was expecting.

There were some notable pluses in Saturday's report, including the record $9.6 billion of stock buys, exceeding the prior quarterly peak of $9 billion in 2020's fourth quarter. That indicates CEO Greg Abel and controlling shareholder Warren Buffett, who oversee the program, thought the stock was cheap.

Many investors have wanted to see Berkshire spend more of its more than $350 billion of cash on stock repurchases and the company finally delivered.

Investors may take heart from the buybacks, which peaked monthly at over $5 billion in September. Repurchases, however, slowed to $2 billion in October as the price took off, Barron's calculates, based on the share count shown for Oct. 28 in the third quarter 10-Q, also released early Saturday.

The stock is up about 15% since the end of the third quarter and hit new records over the past week. Class A shares ended Friday at about $857,000 and Class B shares at $571, both up about 13.5% this year.

Berkshire is price sensitive on its buybacks and generally hasn't liked to pay much more than 1.5 times book value, and the stock is now about 1.6 times the Sept. 30 book value.

Buybacks could drop from the $2 billion October pace if the price doesn't decline.

Berkshire's aggressive buybacks occurred when the A shares traded around $750,000 based on data in the 10-Q -- and they are considerably higher now.

Berkshire's buybacks, while at a record pace in the third quarter, ran at about 3% of the company's $1.25 trillion market value at an annual rate. That is a moderate pace of buybacks by the standard of big corporations, with many companies exceeding 5% and paying dividends.

Berkshire doesn't pay a dividend. The company probably is capable of $50 billion of annual buybacks based on the liquidity of its stock, Barron's has calculated.

Bill Stone, the chief investment officer at Glenview Trust, says "the bigger story is how Abel is beginning to put Berkshire's enormous capital base to work, and whether the company's combination of operating businesses, liquidity and opportunistic capital allocation can continue to distinguish it during a more volatile market environment."

In addition to the buybacks, Berkshire paid about $7 billion in cash to acquire Taylor Morrison, a home builder. The combination of the buybacks and that deal dropped the company's cash position -- adjusting for the payment of Treasury bills -- by about $7 billion, to $352 billion.

There is a lot more for Abel to do to bring down that cash level. A big acquisition of $100 billion or more -- what Buffett calls an elephant-sized deal -- would accomplish that, but that deal, or a transaction of anything close to that level, is proving elusive for Berksire

One bright spot was Berkshire's railroad unit, BNSF, which saw a 14% gain in revenue and 19% rise in after-tax earnings to $1.7 billion -- better than the 15% profit gain for its chief rival, Union Pacific.

The CEO, Abel, has made it a priority to boost margins at BNSF, which has lagged behind most of its peers in profitability. The latest results show Abel's efforts are paying off.

Underwriting profits at the company's huge property and casualty insurance operations -- auto insurer Geico, plus primary insurance and a large reinsurance operation -- were down over 40% to $1.35 billion in the third quarter, but the decline was less than UBS analyst Brian Meredith forecast. He predicted $1.1 billion.

The insurance-market conditions are weakening after a long period of sharply rising premiums. and Berkshire's results were expected to weaken. The issue is the extent of any further potential underwriting profit declines if the P&C cycle keeps softening.

Geico, as expected, had the insurance group's largest decline in underwriting profits of about 45%, reflecting more competitive conditions in the auto insurance market. But Geico's combined ratio still was impressive at more than 91, meaning it had an underwriting margin of 9%. Geico aims for a combined ratio of about 95 or better and it did better than that level.

Investors may be disappointed to see that Berkshire was inactive in the equities market after buying a net $20 billion of stocks in the second quarter, including over $10 billion of Alphabet shares.

The company bought more than $2 billion of stock in the third quarter and sold $3 billion, Barron's calculates. That makes it one of the quieter periods for Berkshire in the stock market in many years. There were plenty of opportunities outside technology, but Berkshire didn't capitalize.

So how will Berkshire stock react Monday?

The financial results and the high quarterly buybacks might normally boost the stock, but given the run-up in the shares, the reaction could be neutral.

The stock is trading above most analyst estimates of intrinsic value. The chief bull on Wall Street is Meredith, who has a Buy rating and price target of about $942,000 on the Class A shares.

He thinks the stock should trade at a premium to intrinsic value, which he puts at about $815,000 per Class A share.