Buffett's 2021 Annual Letter Names 'Four Giants'

^{Source: Predictions based on analysts' consensus from Visible Alpha}

Berkshire Hathaway (BRK.A) Financial Results: Analysis

Berkshire Hathaway, Inc. (BRK.A) reported Q4 FY 2021 earnings that exceeded analysts' expectations. Earnings per share (EPS) were up by 16.0% year over year (YOY) and 44.7% better than analysts' forecasts.

Revenues for Q4 2021 were $112.9 billion, up by 9.1% YOY and beating the estimate by 33.1%. Note that this revenue figure is the sum of operating revenues from Berkshire's operating subsidiaries and the pretax gains on Berkshire's investments and derivative contracts. Also, since Berkshire did not release a quarterly revenue figure for Q4 2021 on Feb. 26, 2022, the $112.9 billion number was derived by taking the full-year 2021 revenue figure of $354.6 billion ($276.1 billion of operating revenues plus $78.5 billion of investment and derivative contract gains) from its 2021 annual report and subtracting the cumulative revenues of $241.7 billion computed by Visible Alpha for the first three quarters of 2021.

In Q4 2021, Berkshire Hathaway recorded an after-tax net gain of $32.4 billion on investments and derivative contracts. This was up by 5.0% from the figure of $30.8 billion recorded in the same period of 2020.

Operating earnings, which exclude these gains, were $7.3 billion, compared to $5.0 billion in the same quarter of 2020. This was an improvement of 45.1% YOY and 15.9% above the estimates. The operating earnings figures that Berkshire reports are calculated after income taxes and exclude earnings attributable to non-controlling interests.

Berkshire spent approximately $6.9 billion on share repurchases (stock buybacks) in Q4 2021. This brought the figure for full year 2021 to about $27 billion.

Over the past year, Berkshire Hathaway's shares have provided a total return of 23.2%, outperforming the S&P 500's total return of 9.3%.

BRK.A Operating Earnings

For many years, Chairman and CEO Warren Buffett has urged investors to focus on Berkshire's operating earnings from its diversified lineup of wholly owned operating subsidiaries, which stretch across a broad spectrum of industries—most notably insurance, railroads, utilities, and energy. However, as a result of recent changes to GAAP reporting rules, the quarterly mark-to-market fluctuations in the value of Berkshire's investment portfolio must be reflected on the company's income statement, a rule that Buffett has decried as introducing misleading volatility into the company's reported financial results.

As noted above, operating earnings increased from $5.0 billion in Q4 FY 2020 to $7.3 billion in Q4 FY 2022, an improvement of 45.1%. Increases were recorded across four of Berkshire's five major reporting segments. Insurance underwriting swung from a loss of $299 million in Q4 FY 2020 to a profit of $372 million in Q4 2021. Insurance investment income fell from $1.270 billion to $1.219 billion. Railroads, utilities, and energy rose from $1.995 billion to $2.241 billion. "Other businesses" (manufacturing, services, and retailing) rose from $2.467 billion to $2.791 billion. "Other" (which includes goodwill and indefinite-lived asset impairment charges) swung from a loss of $412 million in Q4 2020 to a profit of $662 million in Q4 FY 2021.

Berkshire Hathaway's next earnings report, for Q1 FY 2022, is expected to be released on April 30, 2022, the date of the company's annual meeting.

Warren Buffett's 2021 Annual Letter

On Feb. 26, 2022, Berkshire Chairman and CEO Warren Buffett also released his annual letter to shareholders. Highlights are presented below, and italics are as they appear in the letter.

Business Pickers, Not Stock Pickers

"Whatever our form of ownership, our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO ... we own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves. That point is crucial: Charlie [Munger] and I are not stock-pickers; we are business-pickers."

'Infrastructure' Colossus

"Many people perceive Berkshire as a large and somewhat strange collection of financial assets. In truth, Berkshire owns and operates more U.S.-based "infrastructure" assets—classified on our balance sheet as property, plant and equipment—than are owned and operated by any other American corporation. That supremacy has never been our goal. It has, however, become a fact."

"Berkshire is constructed to handle catastrophic events as no other insurer—and that priority will remain long after Charlie and I are gone."

Berkshire's 'Four Giants'

"Through Berkshire, our shareholders own many dozens of businesses ... Nevertheless, operations of our 'Big Four' companies account for a very large chunk of Berkshire's value."

"The insurance business is made to order for Berkshire. The product will never be obsolete, and sales volume will generally increase along with both economic growth and inflation. Also, integrity and capital will forever be important. Our company can and will behave well."

"Apple [Inc. (AAPL)] [is] our runner-up Giant as measured by its yearend market value ... our ownership is a mere 5.55%, up from 5.39% a year earlier. That increase sounds like small potatoes. But consider that each 0.1% of Apple's 2021 earnings amounted to $100 million ...  only dividends from Apple are counted in the GAAP earnings Berkshire reports—and last year, Apple paid us $785 million of those. Yet our 'share' of Apple's earnings amounted to a staggering $5.6 billion."

Note: As of Dec. 31, 2021, Berkshire's stake in Apple had a market value $161.2 billion, representing 45.9% of its $350.7 billion equity investment portfolio.

"[Railroad] BNSF, our third Giant, continues to be the number one artery of American commerce, which makes it an indispensable asset for America as well as for Berkshire. If the many essential products BNSF carries were instead hauled by truck, America's carbon emissions would soar."

"BHE [Berkshire Hathaway Energy], our final Giant, earned a record $4 billion in 2021. That's up more than 30-fold from the $122 million earned in 2000, the year that Berkshire first purchased a BHE stake. Now, Berkshire owns 91.1% of the company."

Note: For full year 2021, Berkshire's insurance, railroad, and utilities and energy segments accounted for a combined $15.0 billion of net earnings. Its manufacturing, service, and retailing segment, which contains the rest of its operating subsidiaries, accounted for $11.1 billion.

Three Ways to Increase Shareholder Value

"There are three ways that we can increase the value of your investment. The first is always front and center in our minds: Increase the long-term earning power of Berkshire's controlled businesses through internal growth or by making acquisitions. Today, internal opportunities deliver far better returns than acquisitions. The size of those opportunities, however, is small compared to Berkshire's resources."

"Our second choice is to buy non-controlling part-interests in the many good or great businesses that are publicly traded ... Today, though, we find little that excites us. That's largely because of a truism: Long-term interest rates that are low push the prices of all productive investments upward, whether these are stocks, apartments, farms, oil wells, whatever."

"Our final path to value creation is to repurchase Berkshire shares. Through that simple act, we increase your share of the many controlled and non-controlled businesses Berkshire owns. When the price/value equation is right, this path is the easiest and most certain way for us to increase your wealth. (Alongside the accretion of value to continuing shareholders, a couple of other parties gain: Repurchases are modestly beneficial to the seller of the repurchased shares and to society as well.)"

"Berkshire's buyback opportunities are limited because of its high-class investor base. If our shares were heavily held by short-term speculators, both price volatility and transaction volumes would materially increase. That kind of reshaping would offer us far greater opportunities for creating value by making repurchases."