Berkshire Hathaway Inc. (BRK.A, BRK.B) reported third-quarter results on Friday, and earnings doubled year-over-year due to a massive $4.4 billion gain recognized in relation to the Kraft Foods-H.J Heinz merger.
Revenue, however, fell slightly short of expectations. Analysts polled by Thomson Reuters expected revenue of $61.12 billion from the conglomerate in the third quarter; total revenue came in at $58.99 billion instead.
However, that top line still was up 15% year-over-year.
The Q3 Breakdown
The Kraft-Heinz windfall was an anomaly that the market knew was coming. The number important to investors here is operating earnings per Class A equivalent share, which clocked in at a whopping $2,769.
That was just a hair above the $2,760.20 that analysts expected going into the quarter.
Those are the types of absurd numbers you get when the greatest investor of all time, Warren Buffett, runs the company for 50 years, never splits the stock, and ends up with a stock worth over $200,000/share.
Operating earnings per affordable BRK share (the Class B ones) came in at $1.85 per share, precisely what Wall Street expected. That was down from the $1.92 seen a year before.
The catalyst behind Berkshire’s massive $4.4 billion in paper profits from the Kraft-Heinz deal boils down to obscure accounting rules. Before the merger, BRK owned 52.5% of Heinz; after the merger it owned 26.9% of the combined company.
The equity method of accounting calls for the recognition of revenue when such events occur as if Berkshire Hathaway had chosen to sell the proportionate amount of the security.
It would’ve amounted to a $7 billion one-time gain if it weren’t for that money-grubbin’ Uncle Sam.
BRK operates across three divisions: Insurance and Other, Railroad, Utilities and Energy, and Finance and Financial Products.
Insurance and Other revenues rose 22.9% year-over-year, from $38.59 billion to $47.42 billion, with the bulk of that gain driven by the Kraft-Heinz deal. Railroad, Utilities & Energy revenue remained precisely stagnant at $10.7 billion, while Finance and Financial Products revenues fell 54%, from $1.9 billion to $870 million, sparked mainly by derivatives that turned sour.
While lower energy prices pressured revenue growth in its railroad and energy divisions, it also dramatically reduced costs, and lower fuel costs helped reduce expenses by $290 million year-over-year.
Both Class A and Class B shares of BRK stock were trading modestly lower in afternoon trading Friday.
As I noted in the Berkshire Hathaway earnings preview, this stock isn’t so much about the quarter-to-quarter as it is about the long-term. The most relevant short- to mid-term catalyst surrounding Berkshire Hathaway nowadays isn’t its quarterly earnings, but rather its succession plan.
One thing’s for sure: No matter who’s next in line for the throne, Warren Buffett’s gonna be one tough act to follow.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.