Motley Fool Hidden Gems Investing - Breaking Down Berkshire Earnings

Episode Date: November 4, 2024

There are a lot of billions on that balance sheet. What might Buffett want to do with all of it? (00:21) Jason Moser and Mary Long discuss: - What to make of Berkshire’s latest sells. - Turnaround ideas for TGI Friday’s. - Uber’s expanding network. Learn more about the Range Rover Sport at www.landroverusa.com Companies discussed: BRK.A, BRK.B, CAVA, UBER, EXPE, TWLO Host: Mary Long Guest: Jason Moser Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. There's a lot of noise, but we're staying focused on businesses. You're listening to Motley Fool Money. I'm Mary Long, joined this morning by Jason Moser. J-Mo, great to see you. Thanks for being here. How's it going? Mary, it's great to be here. Everything's going very well. How about you? Pretty good. Pretty good. I feel like we've got to address up top that it's a big week here in the U.S., the election's tomorrow, and there's sure to be no shortage of news over the next few days. That said, we're kind of making a concerted effort here at Motley Fool Money to do

some intentional counter-programming. We want to be your go-to place for business and investing news, and there is also plenty of that to go around this week. So just a heads up for listeners before JMO and I dive into today's show, we're not going to be running any B-segments throughout this week. Shows will be slightly shorter than usual, but we're just going to focus on relevant business news of the day rather than playing two different segments. Jamo, before we get to the news of the day. Yes. For this past weekend Saturday show, Ricky talked to Matt Argersinger and Alicia Alfieri

about stocks that they'd be buying no matter who's president. One of the questions that he asked each of them was, what do you do to calm down in moments of stress, uncertainty, volatility? Those happen a lot in life. They happen a lot in investing. So I thought I'd kick us off today by turning that same question to you. in life and or in investing, what do you do to keep calm and carry on? Well, I mean, I'm not a big social media guy, but I think tuning that stuff out. I mean,

if you're on social media, I think getting off of social media and kind of, hey, listen, the other day, this weekend, I just went out and took a long walk. I mean, I think anything you can do to unplug and just kind of get back, just realizing all of what's around us. And listen, life is going to go on no matter what happens. You know, just try to get out of that noise, focus on just that day-to-day, what makes your life good. And if you can unplug, anytime you can unplug, I think that's always a good thing. There's certainly a common theme between your answers, Alicia's answers, Matt's answers. I was thinking about what my answer would be for this question, and I settled on walk too. I think

Ricky mentioned the same thing. So we're very pro-walking here at Motley Fool Money. Well, to be fair, one of my favorite things to do while I'm walking is to play golf. So, hey, for the golfers out there, go play some golf. But, yeah, if you have just hobbies that you enjoy, I mean, you know, I enjoy watercolor painting. I mean, just anything you can do to kind of take your mind to another place and just unplugging. Yeah, I think that's a good one. Unplugging, focusing on what you love, focusing on what brings you joy. As I mentioned at the top, we're going to focus on the businesses.

So one of those businesses that reported over the past couple of days was, big name, Berkshire. Their third quarter results came out on Saturday. Before we dive into those a little bit, Jason, not many companies drop their earnings over the weekend. Do you care to remind us why it is that Berkshire chooses to do this? Yeah, this is a good one. And I'm not sure if people know this or how many people know this, but it's actually something he noted in his shareholder letter back in 2018. And I'll read the quote. And it's, quote, media reports sometimes highlight figures that unnecessarily frighten or encourage many readers or viewers.

We will attempt to alleviate this problem by continuing our practice of publishing financial reports late on Friday, well after the market closes or early on Saturday morning. So kind of back to that unplug thing that we were talking about just a minute ago, it seems like he's just saying, hey, look, we're trying to stay out of the madness of the day-to-day news during the Monday through Friday work week and just give something for people to think about maybe over the weekend. Berkshire choosing to do the unplugging for you. Exactly. So Berkshire sold over $36 billion of stock this past quarter, lots of that coming from shedding shares of Apple and Bank of America. The company bought $1.5 billion over that same period. $1.5 billion is a lot of money to me, but in comparison to that $36 billion, pretty paltry. This is the eighth straight quarter during which Buffett sold more stock than he bought.

People like to read a lot into Buffett's moves. Are you reading anything between these lines? No, I mean, personally, not really. I mean, I think there are a number of different reasons why this could be happening. I mean, you kind of said it right. The billions, when we're talking billions of dollars, I mean, that's that's a lot of money to any of us and for most people. So it's worth recognizing he and Berkshire Hathaway, they're playing a different game, right?

They're dealing with vast sums of money and you've got to come up with ways to deploy that capital. And so I think always remembering that they're playing a little bit of a different game than we are. It's worth noting. I mean, we know I mean, Mr. Buffett is is is he's getting up there in years, of course, still still doing really well, of course. But he could be thinking a little bit more forward towards a legacy. And so I think that's always something to keep in mind. But I also think, and I think most people would agree with this to an extent, Berkshire Hathaway, Warren Buffett, Charlie Mugger, they've always been focused on value, right? I mean, that's something I think many people, when you think of Berkshire Hathaway in regard

to investing, there is a value bent to their philosophy. And I think maybe he's looking at the way things stand right now in relation to the way markets are valued. Maybe he's thinking, hey, listen, there aren't a lot of great values out there right now. A bird in the hand, as they say, right? So he's thinking, listen, we've got some great gains we can take advantage of. It's not like he's eliminating these positions. He's trimming some gains. We talk about the benefits of trimming some of those gains when you feel like you're overexposed so that you can then have some capital to redeploy into other great ideas down the road.

So for me, I mean, I don't really read too much into that at all. Just some more numbers to kind of put that $36 billion, which sounds so big, into context. There is a lot of cash on the Berkshire balance sheet, $335 billion this quarter compared to $277 billion in the last. I mean, you kind of just talked about Buffett potentially seeing the market as overvalued. Do you think that that's potentially why he's sitting on so much cash right now? It's possible. I mean, I think a lot of people look at this and think, well, are these signs that he's making a macro call?

And I think that's a very reasonable thing to deliberate. Maybe he's a little bit more pessimistic about the economy, at least in the near term, right? The future state of the economy and sort of how the market might play out here. in the coming years, it's worth noting, he's not even buying back his own stock. And we know that he loves to buy back his own stock when he feels like that value is there. And so I, you know, I think there are a lot of things that could be at play there. And it's worth noting, and this is probably nitpicking, but I mean, there is, there's about $15 billion on that balance sheet that they actually owe for treasury bills that were purchased. So that cash balance is slightly

lower, but, but regardless, and we're still, we're still talking about 300 billion plus dollars on the, on that balance sheet that they, that they are going to be able to deploy at some point or another. And I think he's just, I mean, it kind of goes back to what we were just saying. Maybe he's, maybe he's thinking a little bit more about value. Maybe there are some legacy questions at play there. But again, I, I don't read too terribly much into it other than I think he still has a lot of vigor when you hear him talk. And I guarantee you, he is really excited to be able to put that money to work. I just don't think he feels like he's found the best opportunity for it yet. And when you talk about that large of a sum of money, you really do have

to find very meaningful opportunities. Operating results are a better indicator of Berkshire's business performance than the net income figure. Buffett said this himself, and this is because of accounting rules, they dictate that Berkshire has to include unrealized gains and losses from its stock portfolio in its earnings numbers. So when we look at those operating earnings for this quarter, they declined by about 6%. Does that spell trouble for Berkshire? I don't think so. I think this is part of their business model. It ebbs and flows as expected. So I don't think it really speaks in anything to the core underlying business at all. There were some currency impacts at play here. I think there was a $1.1 billion non-cash loss as a result of the dollar's decline in the period. And so for me, I mean, businesses deal with that type of thing all of the time.

And when you talk about a company like Berkshire Hathaway, currency impacts are absolutely going to come into play a little bit more so than for others. But again, going back to that core business, you look at the way a lot of the core properties of the business perform, really encouraging. I think after-tax profits, Burlington Northern Santa Fe Railroad, that was up 13% to $1.4 billion. You saw Berkshire Hathaway Energy perform very well. that was up almost 3x, I think, to $1.6 billion. And then the insurance investment income also was up considerably, I think 50%, thanks to the way the company is able to run that insurance business and take advantage of the float that they manage quarter in and quarter out. Most investors would probably agree that it's always a good time to remind yourself of some

Buffett aphorisms, of which there are plenty. But this week feels maybe particularly well-suited to kind of talk a little bit about his folksy wisdom. Are there any favorite Buffett lines that you have found yourself repeating to yourself lately? There are so many, I feel like we could devote a whole show to it. So we're not going to do that, of course. But I think to me, one that always stands out, and I think now is a great time. I think this is a terrific time always to remember this. There's a quote he mentions a while back, and he said, the most important quality for an investor, is temperament, not intellect. And I think that just really speaks to not letting your emotions take control, right? And we talk about that a lot here at The Fool. Don't let those

emotions dictate decisions. Just kind of take a step back, assess the situation, take that longer-term view, and don't let those emotions really make hasty decisions that you might regret later on. For what it's worth, I've been thinking a lot about his advice to write your own obituary and then kind of work backwards from that. Not for any morbid reasons, but because it's a reminder for me to kind of focus on what you were talking about earlier, like find the joy that you can control, find the things that light up your life, your little corner of the world, and work each day to find that joy, to spread that joy, and strive to make your little corner of the world a bit better each day. It's pretty easy to be tricked into believing that like what you actually can

control and what's close to you is unimportant because it's smaller than so many of the like big existential questions that we're asked to face with. But it's not. What's small is often good. Well, yeah, I think you're absolutely right. I certainly am not sitting here saying it's easy to sort of, you know, not let your emotions take over. That's something I think we all strive to do as investors over the entirety of our investing lives. But there's really a lot to be said for that. So in some other weekend news, this is quite the pivot from Berkshire. TGI Fridays filed for bankruptcy. Executive Chairman Rohit Manoka blamed this on the company's inability to bounce back financially from the COVID pandemic. Okay, JMO, let's do like a fun

little imaginary game. You're brought in to kind of right this ship. They've got a whole restructuring plan. What's your turnaround plan for TGI Fridays look like? All right. This is a good one because I really don't know. I mean, I think the first thing when I hear this question, the first thing I think of is J.C. Penning. And the main reason why is I start to wonder, like, does the world need a TGI Friday? And I mean, if you think about TGI Friday, I mean, it got its start. I mean, I think it was founded back in like 1965 as a place for, I think, singles to like meet each other as like one of the first bars or restaurant concepts out there to really sort of popularize the happy hour concept. So, I mean, at that time, it was a novel concept. They were

doing something that was really new. And a lot of people started kind of flocking to it, understandably so. But as we all know, I mean, the restaurant industry is extremely competitive and it's very, very difficult. And overwhelmingly, I mean, the odds tell you that if you try to start a restaurant, the odds tell you it's probably not gonna succeed. So the fact that they got to where they've gotten at this point, I mean, hey, you gotta tip your cap to them.

To me, in a sense, it was kind of like a Starbucks thesis. I mean, right, they were kind of trying to establish that third place to a degree. I think if, I tell you, if I'm trying to get this company back on the right track, if I'm the owner of the business, probably looking to hire a really smart ceo i'm trying to hire some kind of an operator in this newfangled sort of future restaurant industry because the restaurant industry has just changed so much through the years not only the stuff that restaurants are serving but the way that

we're actually getting that food as consumers right i mean delivery pickup i mean all of that stuff just wasn't really a thing back then. And so I don't know if there is necessarily a world where TGI Friday needs to exist today, whether it's TGI Friday or Chili's. I mean, they're both kind of the same thing, I guess. I mean, I don't really frequent either one, but I think they've just found themselves in a really tough spot. And I'm just not sure that we live in a world where so many of those concepts need to exist today. Here I was thinking that you were going to say, you know, we're talking about cooking before we start recording. I thought you were going to say, yeah, I've got a turnaround plan. Hire me as head chef. No way. I don't want some smoked pork

shoulder. I listen. I love cooking. You know it. But man, I tell you, I do not have the time to devote to something like that. I enjoy being able to spend it with my family and friends and playing golf and painting. As I said before, the restaurant business is just a brutal one. It's really, really hard, requires a lot of long hours. And even then, all of that hard work doesn't even come close to guaranteeing success on any kind of a sustainable basis. I like that you mentioned that it started as a place for singles to meet. I think if I were asked for a turnaround plan, it might be this. This is kind of half-baked, just as we're starting to talk here. But should TGI Fridays pivot and try to enter

into the dating app space? Would that be interesting? Feels like that's getting a little bit commoditized too, Barry. Man, business is tough, turns out. It is. It really is. But that's the fun part about it. And I mean, like to stick with the restaurant business for a moment, you are seeing TGI Fridays is not the first restaurant chain to announce troubles throughout the year. Per the Wall Street Journal, restaurant chains and operators are on track to declare the most bankruptcies this year than they have in decades, with the exception of 2020. We talked about Buffett earlier. Another favorite quote from him is to be fearful when others are greedy, greedy when others are fearful. Seems to me there's a lot of fear in the food industry right

now. Are there any companies, I know that you're not looking to leave the fool and go start a restaurant, but are there any companies in this space you're watching closely from an investment perspective that might have you feeling a little greedy? Yeah, for sure. I mean, to me, I'm really, really impressed with what kava is doing and i i mean before kava ever went public i mean i i i just love the concept i love the food um i think you know chipotle really set the standard for fast casual and sort of differentiation they're uh giving us a new experience with better food granted you're paying a little bit more for it but i think a lot of people the numbers of the numbers bear this out i mean people are willing to pay for that

Cava absolutely seems to be following in its footsteps. Now, with that said, I mean, I look at Cava today. I mean, the stock price itself reflects a lot of enthusiasm. So I wouldn't say that I'm feeling so greedy about Cava today. But I definitely will say Cava is a restaurant business that is high up on my watch list because of the operations, because of the market that they serve, that differentiation, the Mediterranean offerings that they have, if there is any kind of a big sell-off on the stock

on some kind of an earnings miss or some snafu by a manager or whatever it may be, absolutely my interest would be peaked there. We're going to kind of keep on this look back train because there was a lot of earnings that came out last week, some of which we didn't get to. I knew I was talking to you today.

I love talking to you about Uber. Uber reported earnings last week. Again, with all the big tech earnings coming out, we did not quite get to hit them. So I thought this would be a prime opportunity to get your take on some stuff. Top line up front, Uber's results met or beat the expectations that management had laid out the quarter before. Gross bookings were up year over year, hit $41 billion. Revenue was up 20% year over year.

Earnings per share beat analyst expectations pretty significantly. And yet, JMO, the stock was down almost 10% on Thursday. Why was Wall Street not happy with these numbers? What in the world? Yeah, I mean, Mary, you know, I love Uber. I tell you, I mean, like going back to a few years ago when we took our family to Paris for a spring break vacation and we Ubered everywhere. We never even bothered with a rental car. And I mean, Uber is just tremendous.

I think it's just such a convenient and helpful service. And so for me, I think this is just a tremendous business. I don't read too much into the short term reactions there. I think there's, you know, there's that buy the rumor, sell the news kind of saying, and maybe there's something that plays out there. Maybe the market took a look at the investment gains of the portfolio as that contributes to earnings. And they thought, well, that's not really a core part of the business. And maybe there were some expectations there regarding future bookings growth, the guidance there that weren't as strong as some had hoped. But, you know, we see this all the time.

Companies report great results. they can report great guidance and then the market still sells the stock off. It doesn't make any sense. It defies all logic. But like you noted, I mean, the numbers there were really impressive. The business just continues to perform. They make their money a number of different ways and it really all boils down to transportation. And they've just built this amazing network. It's all tech-based. It's a simple app. They're incorporating more into it. I just, to me, I don't really sweat the small stuff. And to me, this really equates to small stuff. There were rumors in October that Uber might be looking to expand that network even more.

Some talks that they might be looking to acquire the online travel booking Expedia. Uber CEO Dara Khashoggi was the CEO of Expedia before coming to Uber. Are you putting this deal on your 2025 bingo card? I am not. I actually hope this doesn't happen. I don't think it needs to happen. I think acquisitions of this size are just really, really difficult. And I'm not sure that Uber really needs to do it. I understand the interest there, right? Dara still serves on the board at Expedia and obviously is very familiar

with that business given its history there. To me, I mean, I understand the benefits or at least the attraction there, right? A merger, it could create a more seamless travel experience when you combine ride sharing with things like travel booking. It helps them expand their customer base to an extent.

They can create a more personalized experience. I mean, when you talk about data integration, but again, acquisitions are always challenging and acquisitions of this size are just really, really tough. And I'm just not sure that they need to do it, but I do get their interest in that greater travel opportunity.

I mean, as we know, travel, when you consider just the greater travel market opportunity on a global scale, I mean, we're talking about hundreds of billions, if not trillions of dollars. And given Uber's size today, I do get why they would be attracted, but I just don't think that they need to do it. So I want to close this out with a kind of different kind of question. There are lots of different headlines that are sure to be hitting over these next several

days, some business related, some obviously not. So as we kind of close up today's show, JMO, I was wondering if you had one headline or news story that came out this year that surprised you in a good way? Yeah, well, so far this earnings season, I think, to me, I was very encouraged by the quarter that Twilio just reported. Twilio is a company we've spoken about a lot on these shows over the last several years. And it's one that really saw the highest of highs. And now it kind of, you know, it saw the lowest of lows, too, as questions regarding

the business and its overall opportunity came more into play. But they've, you know, they've undergone some changes with the business. They've got new leadership there with Kozema Ship Chandler, who's the new CEO of the business, new-ish, I should say. But he was with the company before. So he has a lot of familiarity with the business. And in seeing the changes that he's made, right, he's not focusing on altering the core business, but really he seems to have a bit more of an operator's focus. He's like, hey, listen, we've got this opportunity in front of us and we have this business that's doing really well. Now, let's really start trying to bring everything down to the bottom line.

And so, I look at the report that Twilio just reported 10% revenue growth there, noting that active customers now stand at over $320,000 versus $306,000 a year ago. Dollar-based net expansion rate this quarter was 105% versus 100% a year ago, or 101% a year ago. And then management, they also raised guidance for the full year, expecting modest revenue growth there close to close to eight percent and and still on target for their their gap operating profitability goals there by by i think the end of 2025 if i'm not mistaken and so you know this is one of those software as a service type businesses where profitability can elude investors

for a long long time and and that doesn't matter when when money's flowing freely but in an environment where it's not uh the market starts to get a little bit more nitpicky there and rightly so. But it does seem like they have this business headed in the right direction, continuing to focus on bringing that share-based compensation down as a percentage of overall revenue. And I think finally, I will say that they introduced a $3 billion share repurchase authorization about a year ago. They've almost exercised that entire $3 billion. And the thing is, when you see this, right, with tech companies, a lot of times those share repurchase authorizations, they just offset stock-based compensation. You don't see that

share count come down. The great thing here is that share count for Twilio has come down 15% since the peak in 2022. So they were really, I think, taking advantage of a depressed share price, buying back shares where they saw real value, a la maybe a Warren Buffett, you know, who knows. But for me, I mean, the stock is up, I think, close to 20% since that earnings release just about maybe a week ago. And as a Twilio shareholder or someone who's recommended the stock, for me, that was really encouraging to see.

Jason Moser, always a pleasure having you on the show and getting to start the morning with you. Thanks so much for the time. Thanks so much for the information. And I hope you find plenty of opportunities this week to do all those activities that bring you joy, walking, cooking, golfing, painting, you name it. Always looking, Mary.

Thanks so much. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that they personally recommend to friends like you.