Berkshire Operating Earnings Beat Expectations; 8% Stock Price Discount Attractive
AI summary card
Berkshire Operating Earnings Beat Expectations; 8% Stock Price Discount Attractive
Operating earnings beat expectations with mixed insurance performance; management emphasizes technology improvements and capital discipline; maintains Buy rating given 8% stock price discount to intrinsic value
- 1Q26 operating earnings of $11.35 billion exceeded market expectations
- GEICO underwriting profit missed expectations but combined ratio remains better than historical average
- BNSF operating margin improved by 240 basis points to 34.4%
- Cash reserves reached $380 billion but share buyback pace was below expectations
- Stock price trades at an 8% discount to intrinsic value, below the historical average of 15%
- Management emphasizes technology investment and operational efficiency improvements
Report interpretation
Overview
UBS published a review of Berkshire Hathaway's 1Q26 results, noting that under Greg Abel's leadership, the company maintains continuity of core principles with a focus on operational improvements. 1Q26 operating earnings beat expectations despite mixed insurance performance. The stock's 8% discount to intrinsic value offers allocation value. UBS maintains a Buy rating but lowers the target price by 2%.
Core views
Insurance operations show structural divergence: GEICO's underwriting profit of $1.4 billion missed expectations by 18%, primarily due to slower premium growth (2% y/y) and a higher loss ratio (74% vs. expected 72%), though the combined ratio of 87.3% remains significantly better than the historical average of 95%. Reinsurance underwriting profit of $379 million was below expectations mainly due to margin compression, while primary insurance benefited from reserve releases to deliver $476 million in profit, beating expectations. Non-insurance businesses performed steadily: BNSF's railroad operating margin expanded by 240 basis points y/y to 34.4%, with management explicitly stating it will narrow the 6-percentage-point margin gap versus industry leaders through technology investments. Berkshire Hathaway Energy's long-term outlook is supported by data center demand but faces policy risks from clean energy subsidy phase-outs. The Manufacturing, Service and Retailing segment saw revenue grow 6% with slightly lower margins. Capital allocation remains disciplined: Cash reserves hit a record high of $380 billion, yet quarterly share repurchases of only $235 million were below expectations. Management reiterated that buybacks occur only when the stock price is significantly below intrinsic value; the current 8% discount is less compelling than the >20% discounts seen during the more aggressive repurchase periods of 2020-2021.
Analysis framework
The report employs a Sum-of-the-Parts (SOTP) valuation to assess intrinsic value: non-insurance businesses are valued at 16x 2027E earnings, while insurance businesses are assigned a 1.9x P/B multiple based on a 10% ROE and 7% cost of equity. By benchmarking operating metrics across segments (e.g., BNSF margins vs. industry leaders), the analysis identifies improvement opportunities and evaluates capital allocation efficiency via discounted cash flow analysis.
Methodology notes
Sum-of-the-Parts Valuation
Values each business segment separately and aggregates them, suitable for diversified holding companies. This report applies P/E multiples to non-insurance businesses and P/B multiples to insurance operations.
Sustainable Competitive Advantage Analysis
Assesses the sustainability of competitive advantages such as GEICO's low-cost structure and BNSF's network effects to explain sources of long-term profitability.
Insurance Market Supply-Demand Analysis
Analyzes intensified competition driven by capital inflows into the insurance market, explaining GEICO's strategy to balance pricing discipline with growth.
Earnings Composition & Sustainability Assessment
Breaks down operating earnings and investment income components, assessing the dilutive effect of $380 billion in cash reserves on near-term returns alongside long-term allocation value.
Key data
- 1Q26 Operating Earnings$11.35 billionBeat market consensus of $11.06 billion; aligned with UBS estimate of $11.4 billion
- GEICO Combined Ratio87.3%Deteriorated 710 bps y/y but remains below historical average of 95%
- BNSF Operating Margin34.4%Improved 240 bps y/y; still 6 ppts below industry leader
- Cash & Short-Term Investments$380 billionIncreased $7 billion q/q to a record high
- Discount to Intrinsic Value8%Below average 15% discount since 2018
Impact & implications
The report suggests Berkshire's permanent capital advantage allows it to patiently await allocation opportunities, while technology investments will drive operational efficiency gains. Underwriting discipline in insurance is particularly critical amid intensifying competition, and data center growth provides new momentum for the energy business. The current valuation discount offers a margin of safety, though massive cash reserves may continue to weigh on near-term returns.
Risks
- Insurance loss ratios rising above expectations
- Declining interest rates impacting investment income
- Phase-out of clean energy subsidies hurting energy segment earnings
- Allocation efficiency risk from large cash reserves
- Regulatory policy changes affecting railroad operations
What to watch
- Progress in GEICO's independent agent channel expansion
- Margin improvement from BNSF's technology investments
- Cash deployment trends (buybacks/M&A)
- Realization of power demand growth from data centers
- Contribution from Tokio Marine partnership