No. of Recommendations: 40
Here's my summary of the annual report ;-)
Warren Buffett paid tribute to Charlie Munger in the annual report, describing Charlie as the architect of Berkshire Hathaway. In 1965, Munger set the investment strategy for Berkshire when he advised Buffett “to buy wonderful businesses at a fair price rather than fair businesses at a wonderful price.” This has resulted in Berkshire becoming a great business with a diverse stream of earnings power and the highest net worth of any U.S. company. Thanks to its immense financial strength, “Berkshire is built to last.” Buffett provided his own advice to investors, “When you find a truly wonderful business, stick with it. Patience pays, and one wonderful business can offset the many mediocre decisions that are inevitable. “
Berkshire Hathaway reported the company’s net worth during 2023 increased by 18.5%, or $87.8 billion, to $561.3 billion with book value equal to about $389,367 per Class A share as of 12/31/23. Berkshire boasts, by far, the largest shareholders’ equity of any U.S. company.
On a GAAP basis, Berkshire reported net earnings of $96.2 billion for the year compared to a $22.8 billion loss in the prior year. Investment gains and losses from changes in the market prices of Berkshire’s substantial equity investments will produce significant volatility in earnings and these investment unrealized “paper” gains or losses in any given period are usually meaningless. Berkshire’s five major equity investment holdings which represent about 79% of total equities held, include American Express at $28.4 billion (which charged 27% higher during 2023 or $6.0 billion); Apple at $174.3 billion (which jumped 46% during the year or a juicy $55.3 billion); Bank of America at $34.8 billion (which gained 2% or $600 million); Coca-Cola at $23.6 billion (which fizzled 7% or -$1.8 billion) and Chevron at $18.8 billion (which was 37% lower or $11.2 billion in value, reflecting partial sales of the position during the year). Berkshire has resumed purchases of Chevron.
During 2023, Berkshire’s revenues rose 21% to $364.5 billion, aided by the contribution from Pilot Travel Centers which was consolidated into Berkshire’s results following the acquisition of Berkshire’s additional 41.4% ownership interest in the company, bringing Berkshire’s total ownership in Pilot to approximately 80% in 2023. Subsequent to year end, Berkshire acquired the remaining 20% interest in Pilot for $2.6 billion. Excluding the acquisition of Pilot, revenues rose 4% for the year. In 2023, Berkshire’s operating earnings increased 21% to $37.4 billion, primarily led by a turnaround in Berkshire’s insurance businesses.
During the year, Berkshire’s insurance businesses performed “exceptionally well” setting records in sales, float and underwriting profits. The insurance segment generated $5.4 billion from underwriting earnings compared to a loss of $30 million in the prior year due to improvements at GEICO, relatively low catastrophe losses, and the acquisition of Alleghany Insurance. Insurance investment income increased 48% during the year to $9.6 billion, reflecting higher interest income as short-term interest rates increased significantly. The float of the insurance operations increased $5 billion during the year to end 2023 at about $169 billion. The combined cost of float was negative during the year due to the $5.4 billion in underwriting gains. Berkshire’s insurance businesses have had an excellent underwriting record, operating at an underwriting profit for 18 of the last 20 years.
In 2023, Burlington Northern Santa Fe’s “earnings declined more than expected as revenues fell.” Burlington Northern Santa Fe’s revenues declined 7% during the year to $23.5 billion, reflecting lower volumes of 6% and average revenue per car/unit decreasing 0.6%, primarily due to lower surcharge revenue, partially offset by favorable changes in business mix. Net earnings rolled 14% lower to $5.1 billion for the year. The decrease was primarily due to lower overall freight volumes and higher non-fuel operating costs, partially offset by lower fuel costs.
An adverse regulatory environment led to a “severe earnings disappointment” at Berkshire Hathaway Energy. While Berkshire Hathaway Energy’s revenues remained relatively flat at $26 billion for the year, net earnings declined 40% to $2.3 billion. The earnings decrease reflected lower earnings from the U.S. regulated utilities, increased wildfire loss estimates of $1.7 billion in 2023, as well as lower earnings from other energy businesses and real estate brokerage businesses.
Comparative operating results for Pilot Travel Center were detailed following the consolidation of the business with revenues and earnings highly dependent on fuel volumes, prices and margins. During the 11 months of consolidation in 2023, Pilot’s revenues traveled 22% lower to $56.8 billion with pre-tax earnings declined 55% to $1.1 billion due to significantly lower fuel prices as well as from lower fuel sales volumes. Pilot sold approximately 16.2 billion gallons of diesel fuel, gasoline and other fuel-related products in 2023 compared to 18.4 billion gallons in 2022.
Berkshire’s Manufacturing businesses reported 2023 revenues relatively flat at $75.4 billion with operating earnings up 2% to $11.4 billion. The Industrial products segment led the way for the year with revenues rising 13% to $34.9 billion and operating earnings increasing 17% to $5.7 billion thanks to improvements at Precision Castparts, IMC and Marmon including acquisitions as part of the Alleghany deal. The Building products segment revenue declined 10% to $26.0 billion and operating earnings declined 13% to $4.2 billion, primarily due to the significant increases in home mortgage rates slowing demand. The Consumer products segment revenue decreased 9% to $14.6 billion, reflecting lower revenues at Forest River as RV sales dropped due to higher interest rates, while operating earnings were up 3% to $1.6 billion, primarily due to the Jazwares acquisition and improved earnings of the apparel and footwear businesses.
Service and Retailing revenues increased 1.0% during the year to $92.6 billion with pre-tax earnings increasing 3% to $5.2 billion. These results reflected the impact of acquisitions and improvements in aviation services.
Berkshire’s balance sheet continues to reflect significant liquidity and a very strong capital base of $561.3 billion as of 12/31/23. Excluding railroad, energy and utility investments, Berkshire ended the year with $570 billion in investments allocated approximately 62.1% to equities ($353.8 billion), 4.2% to fixed-income investments ($23.8 billion), 28.6% in cash and equivalents (to a record $163.3 billion) and 5.1% in equity method investments ($29.0 billion), which includes 26.7% ownership of Kraft Heinz and 27.8% ownership of Occidental Petroleum. Warren Buffett noted he has no plans to acquire Occidental Petroleum but plans to hold his position in the company indefinitely. Berkshire also plans to hold or increase his 9% stakes in five large Japanese trading companies which operate in a highly-diversified manner similar to Berkshire.
Free cash flow increased 36% during the year to $29.8 billion due to higher earnings and favorable working capital changes. During the year, capital expenditures approximated $19.4 billion, which included $13.1 billion for BNSF and BHE, its railroad and utility and energy units. Berkshire expects capital expenditures for BNSF and BHE to approximate $14.3 billion in 2024.
During 2023, Berkshire paid cash of $16.5 billion to acquire equity securities and received proceeds of $40.6 billion from the sale of stocks, including the partial sales of Chevron, BYD, the Chinese electric vehicle manufacture, HPQ and several bank holdings. The equity sales generated $5.0 billion in after-tax realized gains during the year. In addition, Berkshire purchased a net $29.5 billion in Treasury Bills and fixed-income investments. On September 1, 2023, Berkshire Hathaway Energy acquired an additional 50% interest in Cove Point LNG for $3.3 billion, which increased its interest to 75%.
Berkshire repurchases its shares at prices below Berkshire’s intrinsic value, as conservatively determined by Warren Buffett. During 2023, Berkshire repurchased $9.2 billion of its common stock, including $2.2 billion during the fourth quarter. These repurchases included 103 Class A shares purchased at an average price of approximately $541,062 per share in December 2023.
