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Market Performance

It was a surprising finish to the week with most indices finishing up week-over-week.

Market Stats

• S&P 500 trading at ~18x forward earnings according to FactSet… down from 22x+ over the past year.

  

• Earnings estimates anticipate 8.2% growth from 2021-2022 which would also imply 11.3% CAGR from 2019. Yardeni has a nearly identical view of S&P 500 operating earnings.

  

Quick Value

Berkshire Hathaway ($BRK)

I’ve seen plenty of analysis on the shareholder letter and 2021 results so I’ll try to keep my thoughts different from the widely covered buyback news….

• For starters, here’s a quick snip of 2019-2021 earnings by segment:

  

• And here’s a quick look at the past 5 year of net earnings performance…

  

• Excluding investment activity, operating earnings were ~$26bn in 2021 vs. $22.2bn in 2020 and $23.5bn in 2019. From 2017-2021 the non-insurance businesses grew earnings at an 11.6% CAGR vs. the S&P 500 growing earnings at a slightly better 11.7% per year.

  • You could make the argument that Berkshire’s collection of operating businesses will perform more-or-less inline with the S&P 500 over time. Maybe with less volatility or downside risk.

• It’s kind of an odd structure but the Berkshire Hathaway real estate brokerage business is nestled inside Berkshire Hathaway Energy (BHE). The real estate business has grown 16% annually since 2017.

  

• A closer look at the sub-segment performance of operating earnings reveals varying degrees of growth. Some sub-segments have really kicked into high gear post-COVD.

  

• From the chart above, industrial earnings has a big contribution from Precision Castparts Corp which kicked in $1.2bn earnings up 78% from 2020. Lubrizol earnings were down 50% in 2021 (~$500m) and Marmon was up 40% (~$1.4bn).

• A look at the $350bn investment portfolio… $161bn of which consists of Apple shares.

  

• A quick recap of the 2-column valuation method — using a 13x multiple on operating earnings nets a $352 share price

  • Cash & investments around $530bn or $234 per B share

  • Non-insurance net earnings were $20.6bn in 2021; capitalized at 13x would be $268bn or $118 per B share

• Free cash flow was ~$26bn in 2021 — it looks like Berkshire hasn’t made any improvement in cash flow for several years now

  

• The buybacks (totaling $27bn in 2021 and $24.7bn in 2020) look great on the surface but Berkshire isn’t anywhere close to spending down the mega-cash-pile… these buyback amounts represent just the annual FCF generation of the business.