Berkshire Rekindles Romance with Technology Stocks

Berkshire owned 57.4 million shares of Apple as of December 31st, 2016

Billionaire investor Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) seems to have rekindled its penchant for technology stocks in Q4 FY16 when the company nearly quadrupled its stake in Apple Inc. (NASDAQ: AAPL), as per its regulatory filing and as reported by Reuters on February 14th, 2017. Berkshire reported owning 57.4 million shares of Apple as of December 31st, 2016, which would now be worth $7.74 billion, up from just from 15.2 million shares in the iPhone maker three months earlier.

The Company bagged headlines in May 2016 when it announced that it has invested $1.07 billion in Apple as of March 31st 2016. The new, larger stake makes Berkshire one of Apple’s 10 biggest investors. Given Apple’s iconic brand name and financial model, Berkshire’s investment in the tech giant may not be misplaced. The purchase of Apple’s stock appears particularly well-timed since shares of Apple closed up $1.73 at $135.02, also a record closing high, on February 14th, 2017. Assuming that Berkshire has not sold its stake, Apple’s 16.6% gain in 2017 would leave it with a $1.1 billion paper profit in 2017 alone!

Apple clocks record revenues, iPhone sales in Q1 FY17

Apple, which announced its Q1 FY17 financial results on January 31st, 2017, stated that revenue grew 3% to a record high of $78.4 billion versus $75.9 billion in the year-ago same period. Apple reversed three straight quarters of falling revenue on strong holiday demand for its new iPhone 7, which was launched in September 2016. Total iPhone shipments grew 5% to a record 78.29 million units after falling 5% in Q4 FY16. The iPhone accounted for two-thirds of Apple’s sales of $54.37 billion during the reporting quarter. The new iPhone has been promoted aggressively by wireless carriers, amid a massive recall of rival high-end phone, the Samsung Galaxy Note 7, over safety concerns.

Apple returned nearly $15 billion to investors through share repurchases and dividends during Q1 FY17, bringing cumulative payments through its capital return program to over $200 billion. Apple also rewarded shareholders with a cash dividend of $0.57 per share. Apple’s recent investment of $1 billion in SoftBank’s $100-billion tech fund, strategic acquisitions of Tuplejump, Turi, and Emotient to build its capabilities in artificial intelligence, and the launch of new products such as the Apple Watch Nike+ in October 2016, all bode well for the Company’s growth, promising investors good returns in the year ahead.

Known to avoid technology investments, Berkshire has somewhat found comfort in technology stocks in recent years. Having previously invested in Intel Corp. (NASDAQ: INTC), Berkshire’s incursion into the technology sector has had mixed results so far. In early 2011, Berkshire began investing billions in International Business Machines Corp. (NYSE: IBM), and increased that stake slightly in Q1 FY16. Besides its latest interest in tech stocks, Berkshire also added to its holdings of Visa Inc. (NYSE: V) and Bank of New York Mellon Corp. (NYSE: BK).

Berkshire invests in four biggest US airlines

Berkshire also seems to have overcome its aversion for airline stocks when it increased its stake sevenfold in the four biggest US airlines. Berkshire also reported a $9.3 billion airline stake, with investments topping $2.1 billion in each of American Airlines Group Inc. (NASDAQ: AAL), Delta Air Lines Inc. (NYSE: DAL), Southwest Airlines Co. (NYSE: LUV) and United Continental Holdings Inc. (NYSE: UAL).

Delta, the second-largest US carrier, announced its Q4 FY16 and full year FY16 financial results on January 12th, 2017. The airline serves nearly 180 million customers each year and provides scheduled air passengers and cargo transportation globally. During FY16, labor costs were the main drag on Delta Air Lines’ earnings. Delta’s new pilot contract cost it $475 million in Q4 FY16, leading to a 10.6% jump in non-fuel unit costs. Delta said the profit decline stemmed from the recent agreement it struck with its pilots, granting them a 30% raise by 2019. The four-year deal, ratified on December 01st, 2016 is retroactive to January 01st, 2016. Delta generated $1.2 billion of adjusted operating cash flow and $640 million of free cash flow during Q4 FY16. The company used this strong cash generation to invest $600 million into the business for aircraft modifications, facilities upgrades, and technology improvements.

On a similar vein, on November 07th, 2016, pilots at Southwest Airlines Co. (NYSE: LUV), the world’s largest low-cost carrier, agreed to ratify a new contract that will increase their pay by 29.6% over the next four years. In the near term, airlines are expecting pressures on margins as the pace of change in unit revenue will not match the cost impact of higher fuel prices and employee wage increases.

United Continental, the third largest U.S. airline by passenger traffic, announced in December 2016 that is reviewing its order portfolio with Airbus Group SE as it looks to revamp its fleet strategy. United expects the fleet changes to cut capital spending by $1.6 billion over the next two years. The fleet changes are part of $4.8 billion in initiatives intended to bolster the airline’s profitability through 2020. United joins the list of other major carriers in deferring aircraft deliveries, as it looks to trim capital spending in the near-term.

Berkshire diversifies investments

Looking to diversify its investments, Berkshire also disclosed new stakes in satellite radio company Sirius XM Holdings Inc. (NASDAQ: SIRI) and seed company Monsanto Co. (NYSE: MON), which is being bought by Germany’s Bayer AG. In recent years, 86-year-old Warren Buffett seems to have given his deputies Todd Combs and Ted Weschler more freedom to invest in diversified holdings. Combs and Weschler are being seen as the leading candidates to eventually succeed Buffett as Berkshire’s Chief Investment Officer.

The stocks of most companies in which Berkshire invested recently rose on February 14th, 2017, signaling positive investor perception or an indirect sign of Berkshire’s “blessing” for these companies. To fund the new investments, Berkshire shed a $1.8 billion stake in agricultural equipment maker Deere & Co. (NYSE: DE) and nearly all of what remained from a more than decade-old stake in retailer Wal-Mart Stores Inc. (NYSE: WMT).

Stock Performance

Berkshire’s stock stood at $253,690, gaining 0.34%, at the close on Tuesday, February 21st, 2017, having vacillated between an intraday high of $254,380 and a low of $252,759.50 during the session. The stock’s trading volume was at 554 for the day. The Company’s market cap was at $413.51 billion as of Tuesday’s close.

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