Berkshire Hathaway, the conglomerate led by legendary investor Warren Buffett, was in the news this week after posting strong fourth quarter financial results. However, the company’s stock price slipped after Buffett warned of more modest growth prospects ahead and new legal risks facing one of Berkshire’s businesses were highlighted.
In his widely-read annual letter to shareholders released over the weekend, the 93-year-old Buffett reported that Berkshire’s operating profit soared 21% to $37.4 billion in 2022. These stellar results were driven by gains in the company’s massive insurance operations, which include brands like GEICO and General Re. Berkshire also boasted enormous cash reserves topping $167 billion by the end of last year.
This kind of performance has led some investors to speculate that Berkshire may soon reach a $1 trillion valuation, joining an elite club of companies like Apple and Microsoft. But Buffett himself threw cold water on expectations that Berkshire would continue to post outsized growth, stating “All in all, we have no possibility of eye-popping performance.”
In plain English, Buffett was telling shareholders not to expect Berkshire to significantly outperform the overall stock market going forward. He admitted the conglomerate, which owns over 90 businesses ranging from railroads to candy makers, now lacks enough attractive investment options to “move the needle.”
Still, Buffett assured investors that conservatively-managed Berkshire is “built to last” even in turbulent times. He also confirmed that his trusted deputy, Greg Abel, is ready to smoothly take over managing the company when needed.
But some cracks in Berkshire’s fortress-like foundation were revealed this week when the company disclosed new legal risks facing one of its utilities, PacificCorp. PacificCorp, which operates as Rocky Mountain Power, may be sued by the federal government over alleged failure to prevent a major wildfire in Oregon in 2020.
Buffett’s letter predicted the total costs of wildfires, which are becoming larger and more frequent across the Western U.S., will weigh on Berkshire’s utility earnings for many years. This warning likely contributed to the company’s stock slipping from all-time highs reached after the strong quarterly results were announced.
While Berkshire still posted impressive overall gains last year, the legal overhang on one of its utilities and Buffett’s clear message that Berkshire’s best growth is likely in the past may temper investor enthusiasm going forward. The legendary investor, who has delivered 20% average annual returns to shareholders over 50 years, is clearly preparing investors for more modest goals ahead.
Some analysts believe Berkshire’s stock may be approaching full valuation given the cautious outlook expressed by Buffett. The company’s enormous size also limits its ability to find investments large enough to significantly boost future growth. However, Berkshire still possesses an unparalleled collection of businesses that generate steady profits year after year. For long-term investors, Berkshire remains a rock-solid holding despite its fainter future growth prospects.
