Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) is set to demonstrate that persistently high interest rates have actually been a boon rather than a hindrance to the conglomerate. Despite owning a diverse array of businesses, spanning from railroads and energy to candy and insurance, which are typically vulnerable to higher interest rates affecting demand, Berkshire has significantly benefited from the situation.
One reason for this advantage is the substantial cash reserve held by Berkshire, primarily invested in short-term Treasury bills. These holdings have seen their value increase due to elevated interest rates, driven by the Federal Reserve’s efforts to combat inflation. As a result, Jim Shanahan, an analyst at Edward Jones, noted, “It’s clearly benefiting from higher short-term interest rates.” While some sectors such as home and car sales have slowed down with rising interest rates, the overall positive impact on Berkshire is far more significant.
For the full year, Berkshire is expected to earn interest and other investment income of around $5.5 billion, dwarfing the $1.7 billion from the previous year. This surge in income is likely to push its cash reserves to a new record, possibly surpassing the previous high of $149.2 billion set in the third quarter of 2021, and drive a more than 30% increase in operating earnings to $9 billion, according to analysts’ predictions.
Berkshire Hathaway’s earnings are closely monitored as a barometer for the U.S. economy’s health due to the diversity of its business interests, including BNSF, Geico, and Dairy Queen. Although Warren Buffett warned earlier in the year that earnings in many of its operations could decline as the “incredible period” for the U.S. economy concludes, the results are expected to be robust, if not exceptional.
One potential headwind for Berkshire is its equities portfolio, particularly its $350 billion investment in Apple Inc. As Apple’s shares dipped by 12% in the third quarter, the portfolio may incur an estimated 8% loss for the period, resulting in about $27 billion in pretax unrealized investment losses. However, Berkshire traditionally advises investors to look beyond these gains or losses, emphasizing that they are often tied to accounting rules and may not provide a true reflection of the company’s overall performance.
Berkshire Hathaway’s large cash reserves continue to raise questions about how the company intends to deploy them. While the company has engaged in notable deals like the $11.6 billion acquisition of Alleghany Corp. in 2022 and the $3.3 billion purchase of Dominion Energy Inc.’s stake in a Maryland liquefied natural gas export project, the cash reserves remain substantial. The third quarter is expected to see the cash pile exceed $150 billion, reaching the highest level since data collection began in 2014. Nonetheless, Berkshire’s hesitance to engage in more substantial deals may be influenced by high valuations. If valuations do not align with the current high-interest rates, Berkshire seems content to remain on the sidelines, as explained by KBW’s analyst Meyer Shields.
In another instance, Berkshire’s deal to increase its stake in Pilot Flying J, a truck-stop provider, to 80% by paying $8.2 billion is currently embroiled in a legal dispute. This situation offers a rare glimpse into Berkshire’s operations. The transaction contributed 14% to Berkshire’s operating revenue in the first six months of the year. The family that owns the remaining stake in Pilot Flying J has accused Berkshire of violating the acquisition terms by altering the valuation methods, leading to litigation. This dispute represents a deviation from Berkshire’s historical approach of resolving matters out of court, as pointed out by Cathy Seifert, an analyst at CFRA Research.
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