Is this a buying opportunity?
The headline news from Berkshire Hathaway’s (NYSE:BRK.A) (NYSE:LBRK.B) annual meeting was the announcement that Warren Buffett, the longtime chairman and CEO, was stepping down as CEO at the end of the year.
While many expressed shock upon hearing the news, the change at the top has been in the works since 2021 when vice chairman Greg Abel was named the eventual successor. And just last quarter in February, Buffett said; “At 94, it won’t be long before Greg Abel replaces me as CEO and will be writing the annual letters.”
So, this was probably one of the worst kept surprises out there and shouldn’t have been a huge shock to anyone. Then again, the stock price was trending lower, down about 5% on Monday.
The good news is that Buffett is sticking around, as he will remain chairman of the board. But the reality is, as far as transitions go, this one should be fairly seamless as Abel has worked at Buffett’s side for 26 years.
However, there were other factors that caused the stock price to plummet on Monday, particularly the lackluster first quarter earnings.
Operating earnings drop
Berkshire Hathaway had a difficult first quarter, as net earnings dropped 64% to $4.6 billion, from $12.7 billion the same quarter a year ago.
But investors should be less concerned about this result, because the net earnings must factor in the returns for the company’s $268 billion portfolio. The portfolio lost $5 billion in the quarter because it was a bad quarter for stocks, with all of the major indexes down. But these are unrealized losses, not real losses, as the stocks are still in the portfolio.
The number that investors should be more concerned about is the operating earnings, which are the earnings of the several dozens of businesses that Berkshire Hathaway outright owns. One of its biggest businesses is insurance, as it owns several insurance companies.
Operating earnings in Q1 fell 14% to $9.6 billion, from $11.2 billion. The decline in earnings stem, almost entirely, from a $1.3 billion drop in insurance underwriting earnings to $1.3 billion.
Specifically, the decrease is due to a $1.1 billion loss due to the Southern California wildfires that ravaged the region in Q1. This is in comparison to no major catastrophic events in the first quarter of 2024.
In terms of revenue, Berkshire’s businesses generated $89.7 billion, down 3% year-over-year. Insurance revenue fell 1% to $77.7 billion.
Buying opportunity?
Monday’s selloff may be a buying opportunity for investors.
While leadership upheaval, particularly of this magnitude, often sows trepidation among investors, they should not expect much to change when Abel takes over next year. This is especially true with Buffett still on board as chairman during the transition.
Plus, the catastrophic losses in Q1 due to the wildfires are not a typical occurrence, certainly not to that extent.
Berkshire stock is up 14% YTD and over the past 10 years it has averaged a return of about about the same, per year. Because of the diversified assets that Berkshire owns, the stock is typically built to weather tough times and usually beats the market when stocks the broader markets are down.
This might be an opportunity for investors to add some shares of the conglomerate and hold for the long term.
