Berkshire Hathaway (BRK.A) (BRK.B) continues to swim in cash. Berkshire ended the third quarter with $ 149 billion, up from $ 144 billion on June 30 despite repurchasing $ 7.6 billion of shares in the quarter.
Slowly but surely, these share buybacks are having a real impact.
In the fourth quarter, I expect another strong quarter for Berkshire’s operating activities as the equity portfolio continues to grow.
Update of assets in Q4
Berkshire investments in non-Kraft Heinz (KHC) equity securities increased in value 12.3% to $ 334.5 billion from $ 297.7 billion last quarter, most of which came from Apple (AAPL). Again.
From the gain of $ 36.8 billion, after increasing the future tax liability on the balance sheet as “income taxes, mainly deferred” and subtracting 21%, we see a net book value gain of $ 29 billion. dollars for the fourth quarter.
Fourth quarter operating profit
Fourth quarter operating results are expected to be strong again, albeit almost boring in consistency.
Insurance subscription should produce a small gain. The Atlantic hurricane season ended quietly, but persistent claims from Hurricanes Ida and Harvey could impact the fourth quarter, as well as the increase in auto claims as more drivers get back on the road .
i will estimate one $ 300 million gain for this quarter.
Assurance investment income should come around $ 1.2 billion. The billion dollar burden caused by lower interest rates on short-term debt is fully annualized at this point and could improve if the Fed raises rates. Investment income should be higher over the next few quarters.
Railways, utilities and energy should post gains over last year. Rail volumes at BNSF are stable to slightly down from last quarter, but up 7% from last year. For BHE, the fourth quarter is a weaker seasonal time, but there is a lot more economic activity this fourth quarter than the last.
I estimate $ 2.5 billion in the income of this group.
Other companies containing dozens of companies like Precision Castparts, Lubrizol, Marmon and other industrial companies, is expected to post year-over-year gains, although I expect supply chain disruptions and rising commodity prices will impact profitability again this quarter. I expect that many of these costs will be passed on to end customers next year.
I will estimate $ 2.7 billion in the income of this group.
Other should produce a $ 500 million Gain as the stock earnings of Kraft Heinz and Pilot, as well as the continued strength of the US dollar, offset usual expenses (mainly amortization of past acquisitions.)
In total, I expect Q4 operating profit of around $7.2 billion and an annual operating profit of $27.3 billion.
Current book value
As shown in Berkshire’s Q3 10-T 2021 book value as of September 30, 2021 was $ 472 billion.
Adding the $ 29 billion net gain from equity investments to $ 7.2 billion in operating income, I project the Q4-21 book value to $ 508 billion.
Berkshire’s market capitalization as of December 31 was $ 668 billion. Dividing this by $ 508 billion gives a price / book value of 1.31x for T4.
Outlook for 2022 and recommendations
Berkshire Hathaway even traded with the S&P 500 (including dividends) in 2021, but is getting off to a rapid start in 2022.
Although I have commented on Berkshire’s valuation in this series, I have never made a prediction on Berkshire’s stock price relative to the larger S&P 500 Index. Until now. I think Berkshire crushes the S&P 500 in 2022 and outperforms the index by 15% or more.
Why? Evaluation. Now that the Fed is tightening, I think this is the first year in some time that valuation has come back to the fore. I expect, and am personally positioned for, a rotation from high-tech multiple stocks to lower multiple-value stocks, and I think Berkshire is uniquely positioned to benefit from this.
While I’m not predicting a recession or anything drastic, I can absolutely see a scenario where the S&P 500 ends the year flat, with value stocks appreciating 20% and stocks high. multiple technology decreasing by a similar amount.
Keep in mind that Berkshire traded around the pound roughly 1.5 times for much of 2017-2019. I think we could get back to that range in 2022.