Greggory Warren, financial services sector strategist who covers Berkshire Hathway, shares his views on the company’s annual meeting, its numbers and the choice of successor.
Our disappointment
While Berkshire Hathaway's annual meeting has always been entertaining, it hasn't generally been a big source of meaningful insight into the firm's operations.
This year, Ajit Jain and Gregory Abel appeared alongside Warren Buffett and Charlie Munger. That said, we feel that it was lacking in enough good quality questions aimed at the managers about the inner workings of Berkshire's businesses.
We also think one of the biggest drawbacks of the annual meeting format is that it prohibits follow-up questions, which might directly challenge statements coming from management during the course of the meeting. While Becky Quick was apparently given some leeway to do so (which is something she does on a regular basis as a financial reporter), we felt there were many moments that went begging for follow-ups.
Key takeaways
This is purely from an analyst's perspective (which is likely different than what a shareholder or investor is looking for):
- Management's discussion of Berkshire's lack of buying activity during the coronavirus market sell-off last year.
- The need for the firm to potentially raise its pandemic-related loss reserves.
- The notion that Buffett may raise the $20 billion cash backstop he's had in place for the insurance operations and his thoughts about the "dry powder" Berkshire has to pursue acquisitions.
- The competitive positioning of both Geico and BNSF relative to their better-performing peers.
- Our general feeling over much of the past year has been that Berkshire was right to guard its cash reserves, and that with viable investment opportunities few and far between the past 12 months, the best option for the company's excess cash has been Berkshire's own common stock.
The numbers
Berkshire Hathaway reported stronger first-quarter results than we had been forecasting.
- First-quarter revenue, which includes unrealized and realized gains/losses from Berkshire's investments and derivatives portfolios, increased significantly to $70.3 billion (from negative $9.0 billion in the prior year's period).
- Excluding the impact of investment and derivative gains/losses and other adjustments, first-quarter operating revenue increased 5.4% to $64.6 billion.
- Operating earnings, exclusive of the impact of investment and derivative gains/losses, increased 19.5% year over year to $7.0 billion during the March quarter. When including the impact of the investment and derivative gains/losses, operating earnings increased significantly to $11.7 billion (from negative $49.7 billion in the prior year's period).
- Book value per share, which still serves as a decent proxy for measuring changes in Berkshire's intrinsic value, increased 1.8% sequentially to $292,175 (from $287.031 at the end of December), slightly below our forecast of $294,207.
- The company closed out the March quarter with $141.4 billion in cash and cash equivalents, up from $138.3 billion at the end of last year.
Berkshire has an estimated $116.7 billion in dry powder that could be committed to investments, acquisitions, and share repurchases. The company repurchased $6.6 billion of common stock, spent $47 million on bolt-on acquisitions, and was a net seller of equities during the March quarter.
Successor
Greg Abel would be CEO Warren Buffett's successor once he departs the scene. This removes one of the major uncertainties hanging over the company.
We have long believed that Abel was the most likely successor to Buffett, given his age (59) --which satisfies Buffett's criterion that the company's next "CEO should be relatively young, so that he or she can have a long run in the job"--and his combination of both operational and capital allocation experience during his years at Berkshire Hathaway Energy.
With the company's next CEO expected to fill the role of capital-allocator-in-chief, there were two strong candidates in line to take the top job (at least from the time they've spent with the company and their understanding of what Buffett wants the next capital-allocator-in-chief to do): Ajit Jain, who oversees all of Berkshire's insurance operations, and Abel, who has stewardship of the noninsurance businesses.
While we've always thought that Buffett and the board had some deference toward Jain; he's closer to 70 and has not shown much interest in following in Buffett's footsteps (given the pressures of being in that spot once Buffet departs). We've always thought that Berkshire would likely be better served longer term by having Jain to continue to oversee the insurance business (which is really where his passion lies) and have Abel--who will work closely with Jain, as well as Ted Weschler and Todd Combs--focus on properly allocating Berkshire's capital.
Buffett did note that while Abel would succeed him if he departed tomorrow that Jain would succeed Abel if anything were to happen to him.
