Value Investing

Berkshire Hathaway’s Third Quarter Operating Earnings Decline 3.7%

After the market closed today, Berkshire Hathaway released its earnings for the quarter ending September 30, 2015.

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The highlights were:

(1) Operating earnings declined by 3.7% as compared to the third quarter of 2014.

(2) Income from its insurance operations declined by 34%, largely as a result of increasing claims and severity of claims at Geico. Operating earnings from non-insurance businesses increased by 5%.

(3) Net earnings increased by 104% primarily as a result of a large one-time gain resulting from its stake in Kraft Heinz.

(4) Book value per Class A share equaled $151,083, an increase of 0.9% from June 30, 2014.

(5) At Berkshire's closing price of $203,100 on November 6, it is currently trading at 1.34 times book value. Warren Buffett has stated that he would buy back shares when Berkshire traded below 1.2 times book value.

(6) Berkshire had $66 billion of cash on its balance sheet as of September 30. Warren Buffett has stated that he intends to have at least $20 billion of cash as a margin for safety. Part of the remaining $46 billion has been earmarked for Berkshire's planned acquisition of Precision Castparts which should close in early 2016.

(7) Berkshire has “no intention of disposing of our investment in IBM common stock”, even though it has unrealized losses in its investment of approximately $2 billion.

I am quoted in TheStreet about Berkshire's forthcoming earnings (November 5, 2015) as follows:

“The bottom line may look very good, but this is a one-time event,” said David Kass, a professor of finance at the Robert H. Smith School of Business at the University of Maryland and author of a blog dedicated to Berkshire Hathaway. “It's certainly a real number, a real profit that's being earned by Berkshire, and so it will make their earnings report look good. But I think the concern that many analysts might have, they will be focusing on continuing earnings, the operating earnings, what has occurred in the last quarter, and what's likely to occur in subsequent quarters in the near future.”…

“He always puts a lot of weight on book value, which will depend heavily on the value of the stocks in his portfolio,” said Kass.

“As of the end of the second quarter, Berkshire Hathaway's book value was $149,735. Kass said he doubts it would be moving very far from that number in the third quarter.”…

“As Berkshire has acquired large companies rather than pieces of companies as stocks in their portfolio, book value has become a smaller percentage of intrinsic value and therefore a less accurate estimate of the value of the firm,” Kass said.”…

“That doesn't mean book value can be discounted completely, especially as it has also been established as a basis for determining repurchases. Berkshire's board has approved a plan in place since 2012 to buy back its shares when they trade at a less than 20% premium to book value. “It sends a message to investors,” Kass said. “It results in basically creating a floor for the stock.”