CEO Greg Abel Starts Making His Mark at Berkshire

Matthew Palazola, senior PNC insurance equity analyst for Bloomberg Intelligence. He's brought a friend as well that is the Squishmallow, Warren Buffett, which I should say, Matt, before we get into the substance of these earnings. This is a Berkshire Hathaway. This is part of the conglomerate. Is part of the conglomerate. It it is. So a very important part of the conglomerate. Yes. They bought a company called Allegheny a couple of years ago. K. They owned a company called Jazzwares, which makes these toys. And then every year at the annual meeting, they started making a commemorative Buffett and Munger Squishmallow, and people line up around the around the convention center. And you are people because you didn't get one. So did you line up for this? I'm always people. Ed or is up for this. Yes. Alright. I've taken this on another diversion, and I apologize for that. Well, you know, earnings just came out. I think it's amazing. Haven't seen the line item for the Swishmallows yet, but just walk us through the the main takeaways here. I looked at your preview of this. Earnings roughly in line with what you expected. I think you said 11 to 12 Yep. Billion. So right right near there. Looking at my cheat sheet a little bit better than I thought. The insurance earnings better. Kinda across the board, everything better. I was a little disappointed with the share repurchase. So they bought back about $4,500,000,000 worth of their own shares. That is much more than they've done over the past couple of years, but less than I thought they were going to given some disclosures they made in July. Thought around eight? Yeah. I thought around eight because So why are they doing that? So I I think a couple of reasons. So Greg Abel's taken over. And my guess they don't really talk to anybody, but my guess is that he's viewing the intrinsic value of businesses a little bit higher these days. So number one, the insurance businesses, they're overearning, but I think, some of the gains they're making are sustainable. So I think he's looking at that a little bit better. Burlington Northern and the railroad, he's got his eyes on that. He called them out at the annual meeting. He said they're gonna improve their margins there. So I think the underlying earnings power of those businesses are improving. They have tons of cash, so I think he's putting some of it to work. I wanna talk to you about that cash, though, because their their pot did fall. I mean, it's still an enormous number. How much of that I mean, they bought this homebuilder, Taylor Morrison, for 6,800,000,000, but the math isn't quite mapping. The the the cash balance could hit more than that. So they did a couple of things. They also bought $10,000,000,000 worth of Google stock. Okay. They bought a stake in a Japanese insurance company, Tokyo Marine. So they actually this was a a spending quarter for them. It looks like I didn't get the full numbers, but it looks like they were a net buyer of stocks over six months. So putting more money to work than Buffett was doing in his in his last year as a CEO. Let's talk just a bit about Craig Abel. So this is the second quarter of earnings that we've gotten from from him behind you. We had pictures of him at Sun Valley at the Allen Company conference. How is his tenure going thus far? This was a hotly anticipated transition. A lot of people wondering sort of how much continuity there'd be between Bercetche under Buffett to him. What have we learned over these last two quarters? What have you learned since you were out in Omaha for the the big event a few back? Yeah. I think he is much more communicative than than Buffett was. And what does that mean? I mean, I've been to the Berkshire website, which is janky. I mean, it's like is like, shiny shiny two or something. So HTML. Yeah. Of AOL days. Yeah. It's not in that way. More in the annual meeting talking, having more managers there, giving more detail on the companies. Buffett was always it was great to hear his his kind of wit and wisdom, but he was really not talking too much about the operating results of the companies. Interesting. So Abel is doing that. He seems to be much more focused on the operations of the companies, the nitty gritty. Buffett had said over the past couple of years that he was passing people off to Abel regardless. So he was kind of running the ship for a while anyway. So I like what he's doing so far. Impressed, especially like seeing him put capital to work. Does he have his own squishmallow? And how many of these reports do we have to have before I almost feel bad for the guy. He's gonna spend I mean, he could have this job for ten years, and we could still be comparing him to his predecessor. I mean, that's, you know, the blessing and the curse of being the CEO of Berkshire Hathaway. Alright. You mentioned the railroad business. Talk a bit more about that if if you I mean, just a crucial being a crucial part of this portfolio for for a long time. Yeah. So they bought the railroad business. Berkshire is is huge on these monopolistic necessary businesses that will be around for as long as time. Right? So that was the the impetus behind buying Burlington Northern years ago. What has happened is the metrics versus public peers are just worse. So their their operating ratio, which is a railroad metric I'm I'm an insurance guy, but, you know, rail moonlight is a railroad guy. Sure. Sure. The that metric has been worse than their their closest competitor. And Able is really focused on improving that, and it's it's languished for years. So I think, should they do that, increases the intrinsic value of the business. It's it's still a great business for them, but, it needs improvement. One of the places it seems he has stayed pretty consistent is this concentrated portfolio and really backing these, you know, this handful of just these five big stocks, Apple, American Express, Coca Cola, Bank of America, Alpha at Google. Is that gonna stay consistent, you think? Is that what investors are still looking for? Is that continuity, or do they want him to diversify that portfolio at some point? He he explicitly said we're gonna focus on this core group of stocks and not trade much around them. I don't think people wanna see him jumping into new names. They'll I think they'll make moves around the edges, but I think these are gonna stay the core portfolio. They made some moves around Apple, took out a lot of Bank of America stock over the past couple of years, so I think it stays pretty steady. We may wanna wind back here to the the homebuilding acquisition they made before we get there. I mean, your your bread and butter is property casualty insurance, hugely integral to this business as as well. What have we seen broadly in the sector, and sort of how does that manifest in the the data that we got today? So one of the biggest things that's swinging their results is GEICO. So they own GEICO. They've owned it since the seventies. The auto insurance business saw a big spike in losses and post COVID because of the cost of auto parts. So what all of the auto insurance companies did was raise rates a lot. I don't know if you experienced that. You've tried You felt this. I blissfully just sold my car. But Yeah. Drove a car, you probably experienced this, and this was across the board. So what happened is they raised these prices. All of the results of the auto insurance companies got much better to kind of record levels. So now what all of the big players are trying to do is grow. So they're all now fighting. So the pro tip is shop your auto insurance around. Good for the consumer. They're not gonna just lower your price, but if you shop around, you probably get a better deal on your auto insurance because all of the big names are fighting. So that's gonna be the big story is the swing in the auto insurance results, and that will, by billions of dollars, swing their earnings. He plays in railroads, and he plays in insurance recommendations as well. Multifaceted. Wait. Before we let you go, I I want you to play in in homebuilding. Okay. I wanna go back to this Taylor Morrison acquisition because it did seem like an odd time to be betting on the home building market in The US. And we were talking in the newsroom. We were like, well, maybe they also build data centers. No. They build homes. Yeah. Why now? And this was something that was, like, cheered by Buffett. He said this was a great acquisition. So they have home building businesses that they own. Yeah. So this was kind of a compliment to the home businesses that they already own. I think it's they they do manufactured homes, which is Clayton Homes. So they build the home, and then they bring you your house. Right. Put it down. Yeah. This is more building more higher end homes on-site. So it was a nice complement to the businesses that they own. Berkshire is not looking to time things and get it kind of right at the exact moment. I think they wanna be in these necessary businesses. Like, homebuilding is is going to be necessary over time. So I think that was probably the impetus for this deal rather than, you know, may maybe now is the exact right time to buy this company. Alright. Let me ask you lastly here just about the stock. Maybe we can kind of end on that. So up, what, three ish percent here over the course of the year. You don't have to follow the S and P that close to know that is lagging behind where the S and P is. What is your read on? What are folks read on sort of how the stock is doing relative to to the broader index? Yeah. I I mean, the the one of the curses of Berkshire is it it gets seen as this market proxy, but not the not the current market, which is now dominated by AI. I think I mean, this stock is the quintessential anti AI name. Right? So I think when you see those swings in tech, it should probably go the other way, but it hasn't. I think the overhang is still there. The Buffett the Buffett kind of hangover and people kind of waiting still on Greg Abel. Even though I think he's doing a great job, I think there's gonna be that overhang for a little bit longer. But the value of these industrial businesses, manufacturing businesses, think, will manifest themselves more over time.