Thread by @URSOProject

Random observations on Berkshire Hathaway's quarterly which dropped this morning. Lots to like. Those following Berkshire know reported earnings are impacted in the short term by movements in the stock portfolio so are largely useless as an indication of business condition. 1/

While the headline GAAP earning figure reported as a $43.8 billion loss, operating profit totaled a positive $8.2 billion gain. You arrive at the $52 billion difference by excluding $53 billion in after-tax losses on investments and a $1.1 billion gain on currency translation. 2/

Most operating subs are performing at a very high and profitable level. The cash balance, $105.4 billion at quarter-end is always of great interest to many. Cash was $1 billion lower than at 3/31 but $41.3 billion from 12/31 thanks largely to sizable stock market investments. 3/

The stock portfolio, mostly held in BRK's insurance operations, declined by $62.9 billion during the quarter to $327.7 billion, including $3.8 billion in NET purchases. Berkshire bought $57.3 billion and sold $12.0 billion over the first six months, net buys of $45.2 billion. 4/

Following $3.1B in share repurchases during the first quarter, BRK bought none in April and May as the stock rose but then bought just over $1B in June and another ~$475 million or so as of July 26. Since 2019 BRK has repurchased $61B of its shares out, 10.7% of the company. 5/

BRK paid an average $425,454 per A share during the quarter or $283.63 per B equivalent. More than 99% of the shares bought during the quarter were A shares. The cadence of purchases slowed as the stock rose faster in price than the value of the business grew. 6/

The cadence also likely slowed as BRK had plenty of other things to invest in, evidenced by the large stock market purchases during the first half of the year and ongoing capital investments in the energy operation. 7/

The most interesting investment is a purchase of Greg Abel's 1% interest in BHE for $870 million cash. I'd thought that BRK might pay Greg in BRK shares and alleviate a taxable gain on his part. The deal implies an $87 billion value for BHE, which matches my year-end estimate. 8/

To date Greg owns very little of BRK, so after writing a BIG check to Uncle Sam I'd expect he'll be making sizable investments in BRK, soon and ongoing. Berkshire has never paid management or the board in options or RSUs. All shares owned have been bought out of pocket. Rare. 9/

I'd guess BRK didn't pay Greg with BRK shares because of the ongoing repurchases. BRK only buys shares at material discounts to its estimate of intrinsic value. The payment at an $87 billion valuation, a 71% premium to BRK's carrying value, would have been a fair price. 10/

I wouldn't cry for Greg's coming tax bill. His 1% position in BHE included 1% of BRK's $232 million investment in Chinese EV maker BYD, worth $9.1 billion at June 30. Greg's portion of the cost was $2.3 million, now $91 million of his $870 million sale to BRK. What a deal. 11/

BRK continues to spend huge growth Capex in excess of depreciation, with $6.8B spent for the first six months against $4.2B of depreciation expense. BHE will spend nearly $8B this year, double depreciation with massive investments in wind, solar and grid buildout. 12/

Book value declined from $506 billion to $461 billion in Q2 given a ~22% price drop in the stock portfolio for the quarter and ~23% year to date. I had the portfolio marked as $50 billion overvalued at yearend. The stocks are now down ~8% for the year. 13/

With the stock portfolio decline, June 30's book value is a better book value. Today's market cap is 140% of June 30's book value but lower today because the stocks are higher, as well as the progression of earning power. 1.3 to book is not always the same 1.3 to book. 14/

Weakest spot continues to be GEICO. Auto insurers are struggling with inflation in used car prices, parts, labor costs and medical costs. GEICO underwrote at a 105% combined, with losses at 92.8%. Policies in force declined so loss in market share relative to PGR continues. 15/

Some insurers are seeing a slowdown in claims frequencies due to high gasoline prices. They were higher across the board at GEICO in property damage, collision, bodily injury and personal injury. Severity inflation is very high. The good news is they should get ongoing price. 16/

I don't like seeing declining advertising expense unless you are not trying not to grow. Lots of improvement to be made at GEICO. Remainder of the insurers are doing very well. Primary group is growing premium rate and volume. Premiums written up 19%. BH Specialty up 26%! 17/

Lots of premium growth in reinsurance. 72.4% combined with few cats in the first half and positive reserve development. A big chunk of the profitability though, maybe ten points, came from currency given the strong dollar. 18/

Investment income is predictably way up, both dividends and interest on treasury bills. Higher dividends are largely up due to the $45 billion in net common stock buys. Big buys in Chevron and Oxy. If the curve moves higher we'll see if BRK adds to fixed income in insurance. 19/

The railroad is very strong. Chugging. Revenues way up but much on fuel surcharges offsetting higher fuel prices. The rail is a pretty good proxy for the economy. VOLUME DECLINES at all. Down 7.4% in consumer products, 3.9% industrial, 3.2% ag and 2.9% coal. 20/

Offsetting the volume declines are big gains in price/carload and expense management. Net profit up 10% so mid-teens ROE. Expect further volume declines in 2H.
Energy business also running at record profits. Pacificorp was weak but largely on reduced wind credits. 21/

The real estate brokerage is softening. Fewer transactions, lower funded volume and lower refinancing activity.
Aggregate MSR group very strong. Profit up 8% y/y. Lots of discussion about inflation in supply chain. Better price on the top line than I would have expected. 22/

Given price, margins have maintained for the group. Precision Castparts finally showing some improvement. Demand rising for aerospace despite miles flown not back to 2019. OEM deliveries up but not the 787. Lubrizol volumes down. IMC weak in Asia. 23/

Clayton still killing it. Sales up 28% on higher sell prices/higher volume. They expect volumes to weaken. Building products remain strong. Lots of price offsetting higher input and transportation costs. Forest River sales up 37%! Unit sales up 5%. Signs of slowing demand. 24/

Apparel businesses in bad shape. Volumes down, rising customer inventories. Expect slowing demand and ongoing high costs. Not getting price.
TTI sales up 19%. Same thing though - signs of demand declining, customer inventory building. 25/

FlightSafety and NetJets sales up over 20%. Pilot training hours up 29% as furloughed pilots return and require lots of simulator time. Fuel surcharges driving revenue. The pilot shortage will persist for some time. Should stay strong. 26/

BH Auto sales down but profit up. Fewer used/new car sales (chip shortage/supply chain) but higher GM and strong finance and service. Profit up 17%. Margins likely to contract going forward. Sales up at the rest of retail but profit lower, esp. furniture and Pampered Chef. 27/

All in all lots to like. Capital alloation continues excellent. Earning power way up in the stock portfolio thanks to net buys. Repos down, price sensitive but lots of other uses for capital. Worth watching expected slowdown at many subs. Expect lots of price at GEICO. Peace.