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00:00With us now, Matthew Palazzola, Senior PNC Insurance Equity Analyst for Bloomberg Intelligence.
00:03He's brought a friend as well, that is the Squishmallow Warren Buffett,
00:07which I should say, Matt, before we get into the substance of these earnings,
00:10this is a Berkshire Hathaway. This is part of the conglomerate.
00:12Squishmallow is part of the conglomerate.
00:14It is, so a very important part of the conglomerate.
00:17They bought a company called Allegheny a couple of years ago.
00:20They owned a company called Jazzwares, which makes these Squishmallow toys.
00:25And then every year at the annual meeting, they started making a commemorative Buffett and Munger Squishmallow,
00:32and people line up around the convention center.
00:34And you are people, because you didn't get one, so did you line up for this?
00:37I'm always people. I lined up for this, yes.
00:39All right, I've taken us on another diversion, and I apologize for that.
00:42Earnings just came out. Haven't seen the line item for the Squishmallows yet.
00:46But just walk us through the main takeaways here. I looked at your preview of this.
00:49Earnings roughly in line with what you expected. I think you said $11 to $12 billion, so right near there.
00:54Looking at my cheat sheet, a little bit better than I thought.
00:57The insurance earnings better. Kind of across the board, everything better.
01:00I was a little disappointed with the share repurchase.
01:03So they bought back about $4.5 billion worth of their own shares.
01:07That is much more than they've done over the past couple of years,
01:10but less than I thought they were going to, given some disclosures they made in July.
01:14You thought around $8.
01:15Yeah, I thought around $8 because...
01:16So why are they doing that?
01:17So I think a couple of reasons.
01:20So Greg Abel has taken over.
01:22And my guess, they don't really talk to anybody,
01:25but my guess is that he's viewing the intrinsic value of businesses a little bit higher these days.
01:31So number one, the insurance businesses, they're over-earning,
01:35but I think some of the gains they're making are sustainable.
01:39So I think he's looking at that a little bit better.
01:42Burlington Northern, the railroad, he's got his eyes on that.
01:44He called them out at the annual meeting.
01:46He said they're going to improve their margins there.
01:48So I think the underlying earnings power of those businesses are improving.
01:51They have tons of cash.
01:52So I think he's putting some of it to work.
01:54I want to talk to you about that cash, though, because their pot did fall.
01:58I mean, it's still an enormous number.
02:00How much of that...
02:01I mean, they bought this home builder, Taylor Morrison, for $6.8 billion,
02:04but the math isn't quite mathing.
02:06The cash balance hit more than that.
02:08So they did a couple of things.
02:09They also bought $10 billion worth of Google stock.
02:12They bought a stake in a Japanese insurance company, Tokyo Marine.
02:15So they actually, this was a spending quarter for them.
02:20It looks like, I didn't get the full numbers,
02:21but it looks like they were a net buyer of stocks over six months.
02:25So putting more money to work than Buffett was doing in his last year as a CEO.
02:30Let's talk just a bit about Craig Abel.
02:32So this is the second quarter of earnings that we've gotten from him behind you.
02:35We had pictures of him at Sun Valley at the Allen & Company conference.
02:39How is his tenure going thus far?
02:42So this was a hotly anticipated transition.
02:45A lot of people wondering sort of how much continuity there would be
02:47between Berkshire under Buffett to him.
02:49What have we learned over these last two quarters?
02:52What have you learned since you were out in Omaha for the big event a few months back?
02:55Yeah, I think he is much more communicative than Buffett was.
03:00And what does that mean?
03:00I mean, I've been to the Berkshire website, which is janky.
03:02I mean, it's like from like 1992 or something like that.
03:06It is so HTML, yeah.
03:07Straight out of AOL days, yeah.
03:08It's not in that way.
03:11More in the annual meeting, talking, having more managers there,
03:14giving more detail on the companies.
03:16Buffett was always, it was great to hear his kind of wit and wisdom,
03:20but he was really not talking too much about the operating results of the companies.
03:23Interesting.
03:24So Abel is doing that.
03:26He seems to be much more focused on the operations of the companies, the nitty-gritty.
03:29He, Buffett had said over the past couple of years that he was passing people off to Abel regardless.
03:36So he was kind of running the ship for a while anyway.
03:39So I like what he's doing so far.
03:42Impressed, especially like seeing him put capital to work.
03:45Does he have his own squishmallow?
03:47And how many of these reports do we have to have before?
03:51I almost feel bad for the guy.
03:52He's going to spend, I mean, he could have this job for 10 years
03:54and we could still be comparing him to his predecessor.
03:56I mean, that's, you know, the blessing and the curse of being the CEO of Berkshire Hathaway.
04:01All right.
04:02You mentioned the railroad business.
04:03Talk a bit more about that if you want, I mean, just to be a crucial part of this portfolio
04:07for a long time.
04:08Yeah, so they bought the railroad business.
04:11Berkshire is huge on these monopolistic, necessary businesses that will be around for as long as time, right?
04:21So that was the impetus behind buying Burlington Northern years ago.
04:26What has happened is the metrics versus public peers are just worse.
04:33So their operating ratio, which is a railroad metric.
04:37I'm an insurance guy, but, you know, Moonlight is a railroad guy.
04:41Sure, sure.
04:43That metric has been worse than their closest competitor.
04:46And Able is really focused on improving that.
04:50And it's languished for years.
04:53So I think should they do that, increases the intrinsic value of the business.
04:58It's still a great business for them, but it needs improvement.
05:03One of the places it seems he has stayed pretty consistent is this concentrated portfolio and really backing these, you
05:09know, this handful of just these five big stocks, Apple, American Express, Coca-Cola, Bank of America, Alphabet, Google.
05:15Is that going to stay consistent, do you think?
05:17Is that what investors are still looking for?
05:19Is that continuity or do they want him to diversify that portfolio at some point?
05:22He explicitly said we're going to focus on this core group of stocks and not trade much around them.
05:28I don't think people want to see him jumping into new names.
05:32I think they'll make moves around the edges, but I think these are going to stay the core portfolio.
05:36They made some moves around Apple, took out a lot of Bank of America stock over the past couple of
05:42years.
05:42So I think it stays pretty steady.
05:45We may want to wind back here to the home building acquisition they made, but before we get there, I
05:48mean, your bread and butter is property casualty insurance, hugely integral to this business as well.
05:54What have we seen broadly in the sector and sort of how does that manifest in the data that we
05:58got today?
05:59So one of the biggest things that's swinging their results is Geico.
06:02So they own Geico.
06:05They've owned it since the 70s.
06:07The auto insurance business saw a big spike in losses kind of post-COVID because of the cost of auto
06:15parts.
06:16So what all of the auto insurance companies did was raise rates a lot.
06:20I don't know if you experienced that.
06:21I have certainly felt this.
06:22I blissfully just sold my car.
06:24If you drove a car, you probably experienced this, and this was across the board.
06:28So what happened is they raised these prices.
06:30All of the results of the auto insurance companies got much better to kind of record levels.
06:35So now what all of the big players are trying to do is grow.
06:38So they're all now fighting.
06:40So the pro tip is shop your auto insurance around.
06:44That would be good for the consumer, yeah.
06:45They're not going to just lower your price, but if you shop around, you probably get a better deal on
06:48your auto insurance because all of the big names are fighting.
06:51So that's going to be the big story is the swing in the auto insurance results, and that will, by
06:55billions of dollars, swing their earnings.
06:57He plays in railroads, and he plays in insurance recommendations as well.
07:02Multifaceted.
07:02Wait, before we let you go, I want you to play in home building.
07:05I want to go back to this Taylor Morrison acquisition because it did seem like an odd time to be
07:10betting on the home building market in the U.S.
07:12And we were talking in the newsroom.
07:13We were like, well, maybe they also build data centers.
07:15No, they build homes.
07:16Why now?
07:17And this was something that was, like, cheered by Buffett.
07:19He said this was a great acquisition.
07:21So they have home building businesses that they own.
07:23Yeah.
07:25So this was kind of a compliment to the home businesses that they already own.
07:29I think they do manufactured homes, which is Clayton Homes.
07:33So they build the home, and then they bring you your house and put it down.
07:37This is more building more higher-end homes on site.
07:41So it was a nice compliment to the businesses that they own.
07:45Berkshire is not looking to time things and get it kind of right at the exact moment.
07:49I think they want to be in these necessary businesses.
07:53Home building is going to be necessary over time.
07:56So I think that was probably the impetus for this deal rather than, you know, maybe now is the exact
08:01right time to buy this company.
08:02Let me ask you lastly here just about the stock.
08:05Maybe we can kind of end on that.
08:06So up, what, 3-ish percent here over the course of the year.
08:10You don't have to follow the S&P that close.
08:12You know that is lagging behind where the S&P is.
08:14What is your read on?
08:15What are folks' read on sort of how the stock is doing relative to the broader index?
08:19Yeah, I mean, one of the curses of Berkshire is it gets seen as this market proxy but not the
08:25current market, which is now dominated by AI.
08:29I think, I mean, this stock is the quintessential anti-AI name, right?
08:33So I think when you see those swings in tech, it should probably go the other way, but it hasn't.
08:37But I think the overhang is still there, the Buffett kind of hangover and people kind of waiting still on
08:44Greg Abel.
08:45Even though I think he's doing a great job, I think there's going to be that overhang for a little
08:49bit longer.
08:50But the value of these industrial businesses, manufacturing businesses, I think will manifest themselves more over time.
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