- Berkshire Hathaway reported Q4 2020 results on Feb. 27, 2021.
- Earnings per share (EPS) were $23,015.
- EPS were up by 28.5% year-over-year (YOY).
- EPS beat the consensus estimate of $16,177.03 by 42.3%.
- Net investment gains were $30.8 billion, up by 24.6% YOY.
- Net investment gains beat the estimate of $30.1 billion by 2.3%.
Warren Buffett’s Berkshire Hathaway reported strong earnings for the final quarter of 2020, and the 90-year old Chairman and CEO of the famed conglomerate continued to emphasize the strength and resiliency of the American economy in his much-anticipated letter to shareholders, released this morning. “Despite some severe interruptions, our country’s economic progress has been breathtaking. Our unwavering conclusion: Never bet against America,” Buffett wrote.
Berkshire Hathaway Inc. (BRK.A) reported Q4 2020 earnings per share of $23,015, up by 22.9% from the same period in 2019, and beat the consensus estimate among analysts of $16,177.03 by 42.3%. Net investment gains were $30.8 billion, up by 24.6% year-over-year (YOY) and 2.3% better than the consensus estimate of $30.1 billion. Operating earnings were $5.0 billion, up by 13.6% YOY.
Key quotations from Buffett’s letter to shareholders are presented below. Note that Buffett’s comments generally refer to full year 2020, not just Q4 2020. Italics are as they appear in his letter.
Highlights of Buffet’s Letter
Stock Price Performance
The table at the top of Buffett’s letter indicates that, for the second consecutive year, the performance of Berkshire’s stock price lagged the S&P 500 Index by a wide margin. In 2020, for the full year, Berkshire’s stock price increased by just 2.4%, while the S&P 500, with dividends included, was up by 18.4%. In 2019, the respective figures were 11.0% and 31.5%.
“Operating earnings are what count most, even during periods when they are not the largest item in our GAAP total. Our focus at Berkshire is both to increase this segment of our income and to acquire large and favorably-situated businesses. Last year, however, we met neither goal: Berkshire made no sizable acquisitions and operating earnings fell 9%. We did, though, increase Berkshire’s per-share intrinsic value by both retaining earnings and repurchasing about 5% of our shares.”
“As I’ve emphasized many times, Charlie [Munger] and I view Berkshire’s holdings of marketable stocks – at yearend worth $281 billion – as a collection of businesses. We don’t control the operations of those companies, but we do share proportionately in their long-term prosperity. From an accounting standpoint, however, our portion of their earnings is not included in Berkshire’s income. Instead, only what these investees pay us in dividends is recorded on our books. Under GAAP, the huge sums that investees retain on our behalf become invisible.”
“What’s out of sight, however, should not be out of mind: Those unrecorded retained earnings are usually building value – lots of value – for Berkshire.”
“In aggregate, we expect our share of the huge pile of earnings retained by Berkshire’s non-controlled businesses (what others would label our equity portfolio) to eventually deliver us an equal or greater amount of capital gains.”
Avoiding Errors of Conglomerates
“Over time, conglomerates have generally limited themselves to buying businesses in their entirety. That strategy, however, came with two major problems. One was unsolvable: Most of the truly great businesses had no interest in having anyone take them over. Consequently, deal-hungry conglomerateurs had to focus on so-so companies that lacked important and durable competitive strengths.”
“Beyond that, as conglomerateurs dipped into this universe of mediocre businesses, they often found themselves required to pay staggering ‘control’ premiums to snare their quarry.”
“Charlie [Munger] and I want our conglomerate to own all or part of a diverse group of businesses with good economic characteristics and good managers. Whether Berkshire controls these businesses, however, is unimportant to us.”
The Four ‘Family Jewels’
“Most of Berkshire’s value, however, resides in four businesses, three controlled and one in which we have only a 5.4% interest. All four are jewels.”
“The largest in value is our property/casualty insurance operation, which for 53 years has been the core of Berkshire.”
“Berkshire now enjoys $138 billion of insurance ‘float‘ – funds that do not belong to us, but are nevertheless ours to deploy, whether in bonds, stocks or cash equivalents such as U.S. Treasury bills.”
“Our second and third most valuable assets – it’s pretty much a toss-up at this point – are Berkshire’s 100% ownership of BNSF, America’s largest railroad measured by freight volume, and our 5.4% ownership of Apple [Inc. (AAPL)]. And in the fourth spot is our 91% ownership of Berkshire Hathaway Energy (“BHE”).”
“Last year we demonstrated our enthusiasm for Berkshire’s spread of properties by repurchasing the equivalent of 80,998 “A” shares, spending $24.7 billion in the process. That action increased your ownership in all of Berkshire’s businesses by 5.2% without requiring you to so much as touch your wallet.”
“In no way do we think that Berkshire shares should be repurchased at simply any price. I emphasize that point because American CEOs have an embarrassing record of devoting more company funds to repurchases when prices have risen than when they have tanked. Our approach is exactly the reverse.”
“This year, on May 1st, we are planning to go one better. Again, we will rely on Yahoo and CNBC to perform flawlessly. Yahoo will go live at 1 p.m. Eastern Daylight Time (“EDT”). Simply navigate to https://finance.yahoo.com/brklivestream.”
“Our formal meeting will commence at 5:00 p.m. EDT and should finish by 5:30 p.m. Earlier, between 1:30-5:00, we will answer your questions.”
“And now – drum roll, please – a surprise. This year our meeting will be held in Los Angeles . . . and Charlie [Munger] will be on stage with me offering answers and observations throughout the 3 1⁄2-hour question period. I missed him last year and, more important, you clearly missed him. Our other invaluable vice-chairmen, Ajit Jain and Greg Abel, will be with us to answer questions relating to their domains.”