When Berkshire Hathaway Inc. devotees gather in Omaha on Saturday for its annual meeting, there will be a noticeable void on stage.
The meeting is Berkshire’s first since Charlie Munger, Warren Buffett’s long-time business partner and right-hand man, died in November — just months shy of his 100th birthday. Munger’s appearances alongside Buffett, 93, had helped draw crowds of thousands, eager to hear him opine in his blunt and witty style on investing, philosophy, human foibles, corporate excesses and more.
“Without Munger, it may be a somber start, especially for those who have owned the stock and been coming to Omaha for decades,” said Jim Shanahan, an analyst at Edward Jones. “You could see it being kind of weepy for some people.”
Buffett and Munger transformed Berkshire from a failing textile mill into a $862 billion behemoth spanning industries including insurance, energy and railroads — making it a closely watched proxy for US economic health. The firm will report first-quarter results before the meeting kicks off on Saturday, with analysts predicting its collection of insurance businesses and a robust economy will help boost profit. Operating income may jump 10% from a year earlier, when it totaled $8.07 billion, according to Bloomberg Intelligence.
“Earnings will be strong,” said Bill Smead, chief investment officer at Smead Capital Management. “When Main Street does well, the operating businesses at Berkshire do extremely well.”
Insurance Boost
This time around — and without Munger — Buffett will be joined on stage his anointed heir apparent, Greg Abel, 61, who runs all non-insurance operations, and Ajit Jain, who oversees Berkshire’s insurance businesses.
Those businesses may post a 40% jump in earnings on better underwriting results and higher yields, according to Bloomberg Intelligence. In particular, Geico’s underwriting margins may improve substantially on earned rate increases and more favorable claims frequency, UBS Group AG analysts wrote in a note to clients last month.
Jain dubbed the auto insurer a “work in progress” at last year’s annual meeting after it swung to profitability following a string of consecutive losses.
“Geico will be a candidate for some questions,” said Shanahan, noting that the insurer has been losing ground to rival Progressive Corp. “The return to profitability is significant, but on other hand, people will want to know about its outlook after it lost market share and slashed headcount — and whether it will ramp up spending.”
Wildfires, Litigation
Buffett, Abel and Jain can expect to field as many as 60 questions during the meeting at the CHI Health Center Arena in downtown Omaha. Among them will probably be queries about climate risks and wildfire exposure, as Berkshire’s PacifiCorp utility faces liability claims from Oregon blazes in 2020 that could run into the billions of dollars.
In Buffett’s most recent letter to shareholders, he warned that he no longer views investments in western utilities as safe given their exposure to wildfire liability claims and acknowledged making a “costly mistake” by not anticipating the surge in these expenses.
Other units have also faced litigation that may invite questions: Berkshire’s real estate brokerage HomeServices of America recently struck a $250 million settlement agreement in a lawsuit taking aim at agent commissions industrywide. Just this week, it was hit with a fresh complaint from a group of home-buyers accusing the brokerage of inflating compensation to agents.
Economic Barometer
Buffett has long identified his vast business empire as a barometer for US economic health — and investors will look for forecasts for the economy this time. Last year, he predicted the majority of Berkshire’s businesses would report lower earnings as an “incredible period” for the US economy draws to an end. The firm then went on to report fourth-quarter operating earnings of $8.48 billion, up from $6.63 billion a year earlier.
“Though that largely didn’t come to pass, we’d expect a similar message this year,” Bloomberg Intelligence analysts Matthew Palazola and Eric Bedell said. BNSF may post flat revenue growth as lower fuel surcharges offset a rebound in carload volume and wage inflation bites, they wrote. Inflation and higher rates may also weigh on Berkshire’s manufacturing, service and retailing businesses, though those operations have proven resilient, they said.
In recent years, the conglomerate has struggled with a high-class problem: a surplus of cash and nothing to spend it on as elevated public-market valuations deprived the billionaire investor of acquisition targets. Higher interest rates will have taken some pressure off holding that cash, according to Shanahan.
The firm’s cash pile jumped to a record $167.6 billion at year-end — and analysts predict it could be even higher when Berkshire reports results on Saturday.
“There’s so much money sloshing around out there because of the money the Fed has pumped into the system, making valuations even tougher,” Smead said. “Buffett is going to hold that cash position until people get negative about stocks.”
Munger Tribute
The Omaha event — dubbed the “Woodstock for Capitalists” — distinguishes Berkshire’s gathering from most other companies’ annual meetings. The day typically is a showcase for Berkshire’s many holdings — booths handing out See’s Candies, toy trains mimicking Berkshire’s railroad — as well as hours of commentary.
Buffett will likely again pay tribute to Munger’s role in creating the sprawling firm. In his February annual letter, he called him the “architect” of the company and referred to himself as the person “in charge of the construction crew.”
Things won’t be the same without Munger.
“It will be way less fun,” Smead said. “Munger’s sense of humor and wisdom was always the highlight of the meeting.”
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