Berkshire Hathaway (NYSE: BRK.A) posted Q4 earnings which fell in-line with expectations. The company is a diversified mix of businesses and investments, so it's not surprising that the company posted results that were better than expectations and an improvement from Q3 but off 2019 levels.
Inside the Numbers
The biggest headline from the report was its purchase of $9 billion shares in Q4 to bring the total to $24.7 billion in 2020. He also expects another $25 billion in share buybacks in 2021. This is the clearest indication that Buffett believes Berkshire is undervalued as he only repurchases shares when he believes it's trading below intrinsic value.
Buffett's actions are closely watched especially as he tends to do a good job of timing the markets. This time, he has noted that the Federal Reserve's actions prevented asset prices from reaching values that he would consider attractive despite the fact that Berkshire has had record cash holdings for much of the last couple of years. However, Buffett did add that this was probably a net-good for the overall economy and reflected well on Fed Chairman Jerome Powell.
Berkshire has a market cap of $565 billion, so its operating income of $5 billion in Q4 is certainly impressive. For the full year, it posted $21.9 billion in operating income which was a 9% decline from 2019. Still, this is better than the S&P 500 which had a decline in operating income of 21%.
Operating income reflects the performance of Berkshire's businesses. Its net earnings which also includes Berkshire's investments in public companies increased 23% compared to last year to $35.8 billion in the quarter. Berkshire also has $138 billion in cash which gives it plenty of ammunition for more buybacks or deals.
Insights From Buffett's Letter
In his shareholder letter, Buffett reiterated his bullishness on America and said, "Despite some severe interruptions, our country's economic progress has been breathtaking. Our unwavering conclusion: Never bet against America." He added that Berkshire owns more US assets than any other company on the market.
He highlighted two of Berkshire's largest businesses - Burlington Santa Fe and Berkshire Energy. In total, both earned $8.3 billion in 2020 despite some complications from the pandemic.
In terms of the markets, Buffett was bearish on bonds as he said that ultra-low rates make these unattractive for the time being. He is ramping up bets on some undervalued parts of the market like energy and pharmaceuticals while trimming winners like Apple (Nasdaq: AAPL). He also talked about how Berkshire has been a net seller of Apple, however, their ownership stake in the company has actually increased due to buybacks.
Stock Price Outlook
The same factors that made Berkshire an underperformer during the first few months of the market rally are now leading to be a major outperformed. The company has a large exposure to financials and energy which have been particularly strong in recent weeks as frothy parts of the market are experiencing significant weakness.
Looking ahead, Berkshire shares continue to look attractive. It's well-positioned for higher interest rates and renewed economic strength. The company also has a valuation that is 45% cheaper than the S&P 500 (NYSE: SPY). Another catalyst is the share buybacks. $25 billion in buybacks equates to nearly 5% of the entire float being retired which will boost EPS even more on top of the improving economy, higher rates, and oil prices back above $60.