Warren Buffett, whose economic insights are coveted Berkshire Hathaway Deep ties to Inc. in the American economy, there is a sad prediction for his own businesses: the good times may end.
The billionaire investor expects profits at most of Berkshire’s operations to fall this year as the long-predicted recession slows economic activity. He made his comments at the conglomerate’s annual general meeting in Omaha, Nebraska, after Berkshire posted a nearly 13% increase in operating income to $8.07 billion for the first quarter.
“Most of our businesses will report lower earnings this year than last year,” Buffett, 92, said in front of thousands of people at the event on Saturday. For the past six months or so, the “unbelievable period” for the US economy has come to an end, he said.
Berkshire is often seen as a proxy for economic health because of the broad nature of its businesses ranging from railroads to electrical utilities and retail. Buffett himself said that Berkshire owes its success to the extraordinary growth of the US economy in decades, but his prediction for the slowdown of his companies comes as turmoil in regional banks threatens to prevent lending as inflation and higher rates continue to bite.
Buffett’s longtime business partner Charlie Munger, 99, who joined him on stage, said the tough economic environment would also make it difficult for value investors, who typically buy stocks that are cheap. compared to the intrinsic value of businesses.
“Get used to doing less,” Munger said.
Geico was resurrected
Still, Buffett said he expects revenue in insurance underwriting operations — which are less closely related to business activity — to improve this year. Berkshire has already reported higher earnings at businesses including auto-insurer Geico, which swung into profit after six quarters of losses.
Geico posted $703 million in earnings as higher average premiums and lower advertising spending contributed to profits even as claim frequencies fell, Berkshire said in a statement reporting its earnings on Saturday. That revival followed a difficult period for the underwriting business as inflation took away the cost of materials and labor.
Geico faces particular pressure from rivals including Progressive Corp., which Buffett called “well managed,” and Allstate corp. which had long used telematics programs to track drivers and encourage better behavior before Geico introduced the offer. Geico’s profit also helped Berkshire’s insurance underwriting businesses deliver $911 million in profit compared to $167 million last year.
Berkshire has previously said it expects Geico to return to operating profitability by 2023, after premium rate increases are taken into account. Still, Geico remains an issue for Berkshire, with top-line growth in the quarter of less than 1% that “significantly lags peers,” CFRA analyst Cathy Seifert said. .
“I suspect that the rate increase put in place to offset the claimed cost inflation is met with policy cancellations,” he said. “While losing unprofitable policies isn’t always a bad thing — it’s not often the policies — and policyholders — that leave.”
Rails, Running
Other parts of the conglomerate were hit, with after-tax profit from Berkshire Hathaway Energy falling 46.3% from the same time last year amid “lower profits from US regulated utilities, other energy businesses and real estate brokerage businesses.” Rail results were also weaker than expected due to lower freight volumes and higher operating costs, according to Edward Jones analyst Jim Shanahan.
But at one of Berkshire’s best-known businesses, Brooks Running Co., Chief Executive Officer Jim Weber doubts a sharp decline in consumers.
“With unemployment so low, it’s hard to believe we’re going to fall off a cliff into a recession at the consumer level,” Weber said in an interview Friday before the meeting. “I wonder if it could be a recession in asset value.”
Berkshire bought back $4.4 billion in stock, an increase from the same period last year, as the growing investor firm faces turbulent markets that offer few of the blockbuster deals it’s known for. Berkshire has turned more often to buybacks because valuations in the public markets have made it more challenging for Buffett to identify good acquisitions.
Saving money
Berkshire also topped its cash pile, ending the quarter with roughly $130.6 billion, after a year ago with $128.6 billion in cash on hand. The company was a net seller of equities in the quarter, pocketing $10.4 billion from stock sales after deducting purchases.
As the Federal Reserve raised interest rates to curb inflation, Berkshire’s investment income increased, helping overall earnings rise to $35.5 billion in the quarter. Berkshire often recommends that investors look at past investment returns, which are tied to accounting rules and can mislead investors.
“Investment income is going to be bigger this year than last year, and that’s been building,” Buffett said at the annual meeting.