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.

Get The Full Warren Buffett Series in PDF

Get the entire 10-part series on Warren Buffett in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

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.”

 

 

 

 



About the Author

Dr. David Kass
David I Kass Clinical Associate Professor, Department of Finance Ph.D., Harvard University Robert H. Smith School of Business 4412 Van Munching Hall University of Maryland College Park, MD 20742-1815 Phone: 301-405-9683 Email: dkass@rhsmith.umd.edu (link sends e-mail) Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance, and is the Faculty Champion for the Accelerated Finance Fellows. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Dr. Kass has recently appeared on Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), Fox TV, American Public Media's Marketplace Radio, and WYPR Radio (Baltimore), and has been quoted on numerous occasions by Bloomberg News and The Wall Street Journal, where he has primarily discussed Warren Buffett and Berkshire Hathaway. He has also launched a Smith School “Warren Buffett” blog. Dr. Kass has accompanied MBA students on trips to Omaha for private meetings with Warren Buffett, and Finance Fellows to Berkshire Hathaway’s annual meetings. He is an officer of the Harvard Business School Club of Washington, DC, and is a member of the investment and budget committees of a local nonprofit organization. Dr. Kass received a Smith School “Top 15% Teaching Award” for the 2009-2010 academic year.