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Warren Buffett’s Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb) will release its fourth-quarter and full-year 2022 earnings tomorrow at 8 a.m. ET. The conglomerate’s annual reports are always eagerly awaited by investors both for Buffett’s insights on the market as written in his annual letter and as a window into the state of the economy given the diversity and size of Berkshire’s business.
Berkshire saw its second straight year of outperformance in 2022 versus the S&P 500, posting a 4% gain versus the S&P 500’s 19% loss (before counting dividends).
Here are a few key things to watch for in tomorrow’s report and Buffett’s letter:
What’s going on with GEICO? – Berkshire’s core business is insurance, and its insurance lines struggled through the first three quarters of the year on a pure underwriting basis – investment income made the whole segment profitable. GEICO has been the loss leader, losing $1.42 billion in the first nine months of 2022, versus a gain of $1.36B during the same period last year. Losses at GEICO were related to increased claims severities, primarily due to significant cost inflation in property and physical damage claims. The company said higher used car prices are producing increased claims severities on total losses and shortages of car parts are contributing to elevated claims severities on partial losses. Further, injury claims severities continue to trend higher. With used car prices stabilizing, is the segment finally recovering?
Buffett’s thoughts on the markets – Buffett’s thoughts on the market are always eagerly awaited and this will likely be heightened given the current rising interest rate environment and wild market swings. After years of TINA (There is No Alternative) for stocks, bonds are finally looking like an attractive alternative. Stubborn inflation has the Fed likely staying higher for longer on rates, which could continue to pressure stocks. Does Buffett think stocks are still king, or is he looking elsewhere? Buffett was in his investment prime in the 1970s, which was famous for massive inflation. He was a buyer of stocks back then and likely is in the current environment as well. Buffett is very disciplined on price and cheers when stocks get cheaper, something the average investor has a hard time doing. How about recession worries? Is Mr. Buffett pulling out the recession playbook now, or does he see a soft landing for the economy? This will be another key question investors will look to The Oracle for thoughts on. Buffett will also likely weigh in on cryptocurrency, which has seen a precipitous fall from grace amid the FTX scandal. In the past, Buffett has been skeptical of the space and has avoided it. He likely has not changed his tune on crypto.
Any more updates on the Buffett portfolio – Berkshire’s fourth-quarter 13F, released earlier in the month, was largely uneventful, with no new positions bought. The firm added modestly to its massive Apple (NASDAQ:AAPL) stake while cutting its stake in a few banks, including Bank of New York Mellon (NYSE:BK) and U.S. Bancorp (NYSE:USB). The one market-moving event from the quarterly filing was news that the firm lowered its stake in Taiwan Semiconductor Manufacturing (NYSE:TSM) by 86%, which drove a fierce sell-off in the stock. Some speculated that the stock was sold on fears of a Chinese invasion of Taiwan, but Charlie Munger, the longtime business partner of Mr. Buffett, downplayed those fears. “The Chinese leader is a very smart, practical person,” Munger said at the Daily Journal annual meeting in mid-February. “Russia went into Ukraine as it looked like a cakewalk. I don’t think Taiwan looks like such a cakewalk anymore.” He also called Taiwan Semi the “strongest semiconductor company on earth.”
Update on Stock Buybacks – The company repurchased $1.05B of Berkshire shares during the third quarter and approximately $5.25B as of the nine months ended Sept. 30, 2022. Did the pace of share repurchases increase during the fourth quarter?
Updates on Berkshire’s future – With Mr. Buffett now 92 years old and Charlie Munger now 99, questions will continue to be asked about the future of the conglomerate. Greg Abel is seen as the likely successor to continue Buffett’s legacy at Berkshire. Abel currently runs the noninsurance operations at the company. “The directors are in agreement that if something were to happen to me tonight, it would be Greg who’d take over tomorrow morning,” Buffett said in the recent past. Meanwhile, Vice Chairman Ajit Jain would likely continue to run Berkshire’s insurance operations. Jain would be considered the No. 2 at Berkshire, behind Abel, in the event of Mr. Buffett’s death.
Turn in tomorrow to see the Berkshire Hathaway earnings report and instant analysis.
