I spent some time going through Berkshire’s Q3 report, and my takeaway on $BRK.B is more nuanced than when I started. I still think Berkshire is one of the highest-quality businesses in the market. But I’m finding it harder to make the investment case at today’s price than I could a year ago. The good first. BNSF had a very strong quarter. Revenue was up ~15%, pretax earnings up ~19%, volumes up ~4%, and revenue per unit increased ~11%. That is the kind of operating leverage I want to see from a railroad: more volume, pricing power and higher earnings. BHE was also solid, with pretax earnings up ~8%. Manufacturing was reasonably healthy as well. And then there’s the balance sheet. Berkshire still has more than $350B in cash and Treasury bills. That gives Abel something almost no other company has: the ability to sit patiently while everyone else is forced to act. I also like that he’s actually starting to deploy it. OxyChem. Taylor Morrison. Alphabet. And nearly $9.7B of Berkshire buybacks in Q3. That tells me Berkshire isn’t simply sitting on Buffett’s cash pile forever. But there are things I don’t like. GEICO is the biggest one. Q3 underwriting earnings fell roughly 45% YoY. That deserves attention because insurance is one of Berkshire’s crown jewels. A weak quarter isn’t necessarily a thesis-breaker, but I want to see whether this is cyclical or something more structural. The consumer businesses also caught my attention. McLane revenue fell ~7% in Q3 and pretax earnings fell ~22%. Several other retail businesses are seeing weaker demand. I wouldn’t be surprised if Berkshire sees more pressure here if the consumer continues to weaken. This is one thing I think investors sometimes forget about Berkshire: It may have a fortress balance sheet, but the underlying businesses are still exposed to the economy. The other thing I’m wrestling with is capital allocation. I like the Taylor Morrison and OxyChem deals. But Berkshire is now so large that the hurdle rate has to be extremely high. Putting $10B into a mediocre business doesn’t move the needle much anymore. Abel needs to find very large opportunities that can generate attractive returns without taking Berkshire outside its circle of competence. Alphabet is another one I’m watching. I understand the thesis. It’s an exceptional business with enormous cash generation and multiple long-term growth drivers. But I keep coming back to the same question: What return is Berkshire actually underwriting at the price it paid? Great business ≠ great investment at any price. And this is where my view of $BRK.B has changed. When Berkshire was around $400, I found the setup much more compelling. Today, I think the quality is still obvious. The valuation is what makes me hesitate. I’m not looking at Berkshire thinking “sell.” I’m looking at it thinking: I want a better price. The irony is that Berkshire is probably one of the stocks I’d most want to own during a market panic because that’s when its balance sheet, liquidity and capital allocation flexibility become incredibly valuable. But that’s also why I’m reluctant to overpay for that optionality today. My biggest things to watch from here: • GEICO underwriting • Consumer/retail demand • BNSF margins and volumes • BHE’s returns on incremental capital • Abel’s acquisition discipline • Berkshire’s buyback activity • Where that $350B+ cash pile ultimately goes • Whether Alphabet becomes an exceptional investment or simply an exceptional business bought at a less exceptional price My personal conclusion after Q3: Berkshire’s business quality hasn’t changed much. The price has. I still want to own Berkshire. I just don’t feel the same urgency to buy it that I did a year ago. If the market eventually panics, I don’t have to wonder whether the company will have the financial strength to take advantage of it. I just need to make sure I’m paying a price that leaves enough upside for me.
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