Berkshire Hathaway stock could compete as Warren Buffett rakes in cash

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Berkshire Hathaway & # 39; s
The lagging stock could get a boost Monday from stronger-than-expected earnings and a growing pile of cash that CEO Warren Buffett can use for investment or a coveted elephant-sized acquisition.

Berkshire's third-quarter operating revenue, reported on Saturday, increased by 14% to $ 7.9 billion compared to the previous year. Earnings per share rose 15% to $ 4,812, topping the Bloomberg consensus estimate of $ 4,378. Increasing revenue was higher investment income.

The company's cash holdings grew further in the third quarter and hit $ 128 billion, up from $ 122 billion in the second quarter, despite a $ 10 billion investment in the period
Occidental Petroleum
8% preferred stock. Berkshire agreed to invest to help Occidental (ticker: OXY) pursue its controversial acquisition of Anadarko Petroleum.

The A shares (BRK.A), which ended Friday at $ 323,400, are up 5.7% this year, which is bad after
S&P 500
index, which has returned 24%. Berkshire is having one of its worst years compared to the overall market through Buffett's 54 years at the helm. Berkshire's more liquid Class B shares (BRK.B) ended at $ 215.83 on Friday.

Berkshire's book value rose by 4% in the third quarter against the second quarter to about $ 243,500 per share in A, Barron's calculates.

This means that Berkshire now trades for 1.3 times posted on September 30, below an average of 1.4 to 1.5 times in recent years. Berkshire is about 21 times projected earnings from 2019 – also low compared to history. While Berkshire is trading above the market multiple of 18, its price / earnings ratio is underestimated to the extent that it only includes dividends on its $ 220 billion equity portfolio in earnings.

Berkshire's book value has probably risen since the end of the third quarter due to continued gains in the stock market, especially in the
apple
(AAPL), Berkshire's largest stake of $ 71 billion. Apple's share increases by more than $ 8 billion since September 30. Buffett has emphasized book value as a Berkshire yardstick, but many analysts and investors continue to track it and see it as a discrete power of attorney for the company's intrinsic value. [19659006] Berkshire's share buybacks were a modest $ 700 million in the third quarter despite ample earnings and more cash accumulation.

When Buffett and Deputy Charlie Munger gained the authority to repurchase Berkshire shares in the summer of 2018, many Berkshire fans hoped the company, whose repurchases had previously been minimal, would increase the pace and buy back at least $ 10 billion annually, or 2% of outstanding shares. The company does not pay dividends.

But Buffett, 89, who has never been concerned about buybacks in Berkshire, has been cautious, and the company has repurchased $ 2.8 billion in the first three quarters of this year. Ironically, Berkshire's low buy-back rate is that Buffett has been an enthusiastic advocate for aggressive stock buybacks in companies where Berkshire has large shareholdings, including Apple,
Bank of America
(BAC), and
Wells Fargo
(WFC).

Berkshire appears to have stepped up its repurchase rate so far in the fourth quarter based on stock count on October 24, revealed in its 10-Q filing to around 1.629 billion A shares (with the B shares converted to a corresponding amount of A). This suggests a buyback of around $ 500 million since September 30.

Berkshire continues to hum as investors ponder whether Buffett will ever find an acquisition of $ 50 billion or more of elephant size. With Berkshire poorly following the stock market this year despite solid financial performance, the stock looks appealing and is a good alternative to peak the market in the coming months.

Write to Andrew Bary at andrew.bary@barrons.com