Upgrading to Outperform into the Sell-Off: A Cyclically Weak Quarter Masks a 12-Point Relative De-Rating, Abel's First Letter Reopens the Buyback Door, and OxyChem Closes
Key Takeaways
- The quarter was genuinely soft — and almost entirely for cyclical, non-structural reasons. Q4 operating earnings fell 29.8% and full-year operating earnings fell 6.2% to $44.5B, driven by insurance underwriting (Q4 −54%, FY −19.5%) normalizing off an exceptional 2024, the Q1 California wildfires, and a ~$1.8B swing in non-cash FX (from a +$1.15B tailwind in 2024 to a −$642M headwind in 2025). The core engines grew: BNSF +8.8%, BHE +6.7%, manufacturing/service/retailing +4.4%.
- 2025 was Berkshire's worst relative year in memory — and that is the opportunity. The stock returned ~+10.9% against the S&P 500's ~+23.1%, a 12-point shortfall, all of it accruing after the May succession announcement. At the post-print close of $480.17, Berkshire trades at roughly 1.44x book — the low end of its decade range and the cheapest point in our coverage window.
- Abel's first letter reopened the buyback door. He framed repurchases as available when the stock sits below a conservative estimate of intrinsic value (in consultation with Buffett), committed to the decentralized culture "into perpetuity" and a 20-year stewardship horizon, cast the CEO's first job as Chief Risk Officer, and singled out BNSF's margin gap to Union Pacific as an opportunity. After a year of zero buybacks, that is a meaningful change in tone from the new capital allocator.
- Capital is now visibly moving. OxyChem ($9.7B) closed January 2 — the first major acquisition in three years — and the cash pile still finished the year at a record ~$373B. The deployment question we have pressed for two quarters is finally getting an answer.
- Rating: Upgrading to Outperform from Hold. We are upgrading into the 4.9% post-print drop, not despite it. The weak quarter is the kind of insurance/FX cyclicality that reverses; the de-rating is real and has handed us the cheaper entry we said we wanted at initiation; and for the first time the capital-allocation catalyst is visible — a new CEO signaling buybacks plus a deal actually closing. A fortress balance sheet, defensive earnings, and a 12-point relative discount into a narrow, AI-led market is a favorable 12-month setup.
Results vs. Expectations
On the surface this was a poor year by Berkshire's standards — operating earnings down for the first time since the rate-driven trough — and an outright weak fourth quarter. Underneath, almost every dollar of the decline traces to two reversible items: a normalization in insurance underwriting and a non-cash FX swing. The durable operating businesses grew.
| Metric (after-tax) | Q4 2025 | FY2025 | FY2024 | FY Y/Y |
|---|---|---|---|---|
| Operating earnings | $10,200M | $44,486M | $47,437M | −6.2% |
| Operating EPS (Class B) | ~$4.73 | ~$20.62 | ~$22.00 | −6.2% |
| GAAP net earnings | $19,199M | $66,968M | $88,995M | −24.8% |
| Cash + T-bills (year-end) | — | ~$373.3B | ~$334B | Record |
| Insurance float | — | ~$176B | ~$171B | +$5B |
| Book value (equity) | — | $717.4B | ~$649B | +10.5% |
Operating earnings by segment (after-tax)
| Segment | Q4 2025 | FY2025 | FY2024 | FY Y/Y |
|---|---|---|---|---|
| Insurance — underwriting | $1,561M | $7,258M | $9,020M | −19.5% |
| Insurance — investment income | $3,072M | $12,513M | $13,670M | −8.5% |
| Railroad (BNSF) | $1,347M | $5,476M | $5,031M | +8.8% |
| Utilities & energy (BHE) | $691M | $3,979M | $3,730M | +6.7% |
| Manufacturing, service & retailing | $3,370M | $13,647M | $13,072M | +4.4% |
| Other (incl. FX on non-USD debt) | $159M | $1,613M | $2,914M | −44.6% |
| Operating earnings | $10,200M | $44,486M | $47,437M | −6.2% |
Segment Performance
Insurance — Underwriting & GEICO
Full-year underwriting profit fell 19.5% to $7,258M, and the fourth quarter was weaker still (−54%). The year carried ~$850M of catastrophe losses (chiefly the Q1 Southern California wildfires) and some adverse casualty development, against a 2024 that was unusually benign. GEICO's full-year pre-tax underwriting fell 12.7% to $6,824M as it spent to grow — premiums written rose 5.3% and policies-in-force expanded — but its combined ratio of 84.7% (and the overall insurance combined ratio of 87.1%) remains excellent.
Assessment: Insurance is a lumpy business by nature, and a year with a major wildfire event and a deliberate GEICO growth investment was always going to give back some of 2024's exceptional underwriting margin. An 87% group combined ratio in a "bad" year is the tell: this is normalization within a strong franchise, not deterioration. The float reached ~$176B at negative cost — the engine that funds the enterprise is bigger and cheaper than ever. We treat the underwriting decline as cyclical and largely behind us.
Insurance — Investment Income
Investment income fell 8.5% for the year to $12,513M as front-end rates eased and the T-bill book reinvested lower — the second straight quarter this line has been a headwind rather than a tailwind.
Assessment: This remains the cleanest measure of the cash pile's carrying cost. With ~$321B in Treasury bills at year-end, every leg lower in short rates pressures this line directly. It is a reason the idle cash needs to find higher-returning homes — and a reason the OxyChem deal and a re-engaged buyback matter beyond their headline size.
Railroad — BNSF
BNSF delivered the cleanest year in the portfolio: net earnings up 8.8% to $5,476M on essentially flat revenue of $23,350M, with the operating ratio improving 2.5 points to 65.5% and volumes up 0.3%. The margin story we tracked all year compounded into a strong full-year result.
Assessment: Three consecutive quarters of operating-ratio improvement, capped by a full-year ratio down 250 basis points, is real structural progress — and Abel called out the remaining gap to Union Pacific in his letter, signaling it stays a management priority. BNSF is quietly transitioning from a flat-line cyclical into an earnings-grower. In a sum-of-the-parts, this is a segment that should be re-rating up, not down.
Utilities & Energy — BHE
BHE earnings rose 6.7% for the year to $3,979M, and the wildfire picture improved at the margin: the PacifiCorp wildfire accrual was $100M for the year versus $346M prior, and a $575M federal settlement was reached February 20. The contingency is far from closed — roughly $50B in unsettled demands remain, against $606M of bonds posted — but the trajectory is toward bounding rather than expanding the liability.
Assessment: BHE's earnings growth re-accelerated and, more importantly, the wildfire tail showed the first signs of being managed down — a smaller annual accrual and a concrete federal settlement. We are still discounting the segment for the open ~$50B of demands, but the direction of travel improved this year. Pair that with the One Big Beautiful Bill Act's renewable-credit phase-out, which Berkshire is still digesting, and BHE remains the segment with the widest range of outcomes — but the downside tail looks marginally better contained than it did at mid-year.
Manufacturing, Service & Retailing
The industrial and consumer collection earned $13,647M for the year, up 4.4% — the steady ballast doing its job through a choppy macro.
Assessment: Another year of mid-single-digit growth across dozens of unrelated businesses, with OxyChem about to join the roster. This is the part of Berkshire that simply compounds, and the addition of a top-three US chemicals operation gives it a new, cash-generative leg.
Other — The FX Headwind
"Other" fell 44.6% to $1,613M, dominated by the FX reversal: after-tax remeasurement on non-USD debt swung roughly $1.8B against Berkshire year-over-year.
Assessment: The same non-cash wildcard that flattered Q3 punished the full year. It will reverse again with the dollar. We continue to look through it — and we note, again, that a single non-operating line moving this much is why the segment detail matters more than the operating-earnings headline for this company.
Abel's First Letter — The New Capital Allocator Speaks
Berkshire holds no call, but the annual shareholder letter is the nearest thing to a statement of intent — and this year's, the first under Greg Abel, was read closely for exactly that. The themes that matter for the investment case:
- Buybacks are back on the table. Abel framed repurchases as available when the stock trades below a conservative estimate of intrinsic value, made in consultation with Buffett as Chairman. After a full year of zero buybacks, re-establishing the repurchase framework in his first letter is the single most important signal in the document.
- Continuity over reinvention. He committed to the decentralized operating model and the Berkshire culture "into perpetuity," and framed his stewardship on a 20-year horizon — explicitly reassuring the market that the handover is not a strategic reset.
- Risk first. Echoing Buffett, Abel cast the CEO's primary role as Chief Risk Officer — the right posture for a balance sheet whose value is its durability.
- BNSF as an opportunity. He singled out the railroad's operating-margin gap to Union Pacific, signaling continued focus on the margin progress already visible in the numbers.
Assessment: A first letter is a low-information document by design — no new strategy gets unveiled. But the marginal content here is constructive: a new CEO whose opening move is to re-establish the buyback framework and reaffirm the model is exactly what a shareholder worried about a post-Buffett discontinuity wanted to read. Words are not deeds, and we will hold the buyback signal to the test of an actual repurchase. But combined with OxyChem closing, the letter shifts the capital-allocation narrative from "stalled" toward "re-engaging" — and that shift is central to our upgrade.
Capital Allocation & The Cash Question
For two quarters we have argued that the rating hinges on whether the cash moves. This quarter, for the first time, the answer tilted yes:
- Acquisitions: OxyChem ($9.7B) closed January 2 — capital actually deployed, not just announced. The first major deal in three years is now done.
- Buybacks: Zero for FY2025 — but Abel's letter reopened the framework, the most concrete forward signal yet that repurchases can resume.
- Equities: Net seller of ~$13.8B for the year, though the pace continued to slow.
- Cash: A record ~$373B at year-end — still enormous, still earning a falling T-bill yield, but now with two outlets (a closed deal and a reopened buyback framework) beginning to drain it.
Assessment: The deployment logjam is breaking. It is breaking slowly — a $9.7B deal and a verbal buyback signal against a $373B pile is a first step, not a flood — but the direction has reversed for the first time in our coverage. That, paired with a stock that has de-rated to ~1.44x book, is what moves us off the sidelines. We are no longer waiting to pay full price for the optionality; we are being paid (via the discount) to wait for it to be realized.
Book Value & Valuation — The Case for the Upgrade
Book value rose 10.5% to $717.4B. At the post-print close of $480.17, the market capitalization of roughly $1.04T puts the stock at approximately 1.44x book — toward the low end of its decade-long 1.3x–1.5x range, and the cheapest level in our four-quarter window. The equity portfolio is $297.8B; the five largest holdings (American Express, Apple, Bank of America, Coca-Cola, Chevron) are 65% of it.
The relative-performance math is the heart of the upgrade. Berkshire returned ~+10.9% in 2025 against the S&P 500's ~+23.1% — a 12-point shortfall in a single year, essentially all of it post-dating the May succession announcement. The stock now sits ~11% below its $539.80 all-time high, in the lower third of its 52-week range, having just absorbed a 4.9% post-print drop.
Assessment: This is the setup we said at initiation would make us constructive — a cheaper multiple (~1.44x vs. ~1.5x), a wider margin of safety, and now a capital-allocation catalyst. We are upgrading into the sell-off because the forward risk/reward has genuinely improved: the bad news (weak underwriting, FX) is in the print and is cyclical; the good news (de-rated valuation, reopened buybacks, OxyChem closed, defensive earnings) is forward-looking. A fortress balance sheet at 1.44x book, trailing the index by 12 points, into a narrow and richly-valued market, is an attractive 12-month proposition.
Market Reaction
- Pre-print setup: BRK-B closed at $504.95 on Friday, February 27, up 0.5% year-to-date (2026) and roughly in line with the flat S&P 500, but down 1.7% over the trailing twelve months — a rare TTM underperformance for the stock.
- Reaction session (Monday, March 2): Shares gapped down 1.9% and closed at $480.17, off 4.9% on the day (−$24.78), on volume of 11.7M versus a 4.8M 30-day average — 2.4x normal and the heaviest reaction in our window. The S&P 500 was flat.
The market took the weak underwriting print and the down full-year at face value, selling the stock to the lower third of its 52-week range on heavy volume. That is the reaction of a market focused on the trailing quarter; our upgrade is a bet on the forward setup the sell-off creates. When a fairly-valued defensive compounder gets marked down 4.9% on cyclical insurance softness while sitting 12 points behind the index for the year, the risk/reward improves — and the heavy-volume capitulation is often closer to the bottom than the top.
Street Perspective
Debate: Is the weak quarter cyclical or the start of a fade?
Bull view: Pure cyclicality — a wildfire year, a GEICO growth investment, and an FX reversal, against the core engines (BNSF, BHE, manufacturing) all growing. Insurance is lumpy; this is a give-back, not a decline.
Bear view: Operating earnings fell for the year, investment income is rolling over as rates drop, and the cash drag is real. Maybe the easy post-pandemic earnings tailwinds are simply behind the company.
Our take: Decisively the bull's read. Strip the wildfire losses and the non-cash FX swing and the operating businesses grew; an 87% group combined ratio in a "bad" insurance year proves the franchise is intact. The investment-income decline is the one legitimate concern, and it is the strongest argument for deploying the cash — which is exactly what is now starting.
Debate: Does Abel's buyback signal mean anything before an actual repurchase?
Bull view: A new CEO choosing to re-establish the buyback framework in his very first letter is a deliberate signal of intent — and with the stock at ~1.44x book, the conditions he describes are arguably already met.
Bear view: Talk is cheap; Berkshire bought back nothing for a full year while the stock de-rated. Until a repurchase actually prints, the framework is just words.
Our take: The bear is right that words aren't deeds — which is why we frame this as a catalyst to verify, not a fait accompli. But the bull is right that the signal is meaningful: re-opening the framework at a de-rated multiple, in a debut letter, is the strongest indication yet that repurchases resume. We are positioned for it and watching Q1 for confirmation.
Debate: Is the 12-point relative de-rating a buying opportunity?
Bull view: A fortress balance sheet and best-in-class businesses, 12 points behind a narrow AI-led market, at the low end of its valuation range, with defensive characteristics and a reopening capital-allocation story — that is a classic mean-reversion setup into the next bout of volatility.
Bear view: The lag is structurally justified — no AI exposure, a quarter of the company in cash, and a leadership transition. In a momentum market, cheap can stay cheap.
Our take: We now side with the bull, which is the change from last quarter. The discount is wide enough, the catalyst is visible, and the defensiveness is valuable precisely because the market is narrow and richly valued. The asymmetry has tilted in the buyer's favor.
Thesis Scorecard
| Thesis Point | Status | Notes |
|---|---|---|
| Bull: Core operating engine compounds through cycles | Confirmed | BNSF +8.8%, BHE +6.7%, MSR +4.4% for the year |
| Bull: Capital allocation re-engaging | Improving | OxyChem closed Jan 2; Abel reopens buyback framework |
| Bull: Relative de-rating creates a margin of safety | Confirmed | ~1.44x book, 12-pt 2025 lag to S&P — cheapest of the window |
| Bear: Insurance/FX cyclicality dragged earnings | Confirmed but reversible | Underwriting normalization + ~$1.8B FX swing; not structural |
| Bear: Cash drag rising as rates fall | Confirmed | Investment income −8.5%; the case for deploying the pile |
Overall: Thesis strengthened. The franchise proved durable through a cyclically soft year, the capital-allocation logjam began to break, and the stock de-rated to the cheapest level of our coverage — the combination that turns a Hold into an Outperform.
Action: Upgrading to Outperform from Hold. Buy the cyclical weakness and the relative de-rating, with the reopened buyback framework and OxyChem deployment as the catalysts. The 12-month risk/reward now favors the stock.