Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) announces second-quarter earnings Friday, August 4, after the markets close. Like every quarterly report from Warren Buffett, there will be lots of little nuggets of information hidden in plain sight within the 40-plus pages of text and financial statements.
Our job in the media is to try and give you an idea what to look for in Berkshire earnings that will influence the future trajectory of Berkshire stock.
That’s easier said than done given its broad diversification. One person’s gold is another person’s garbage.
While it’s clear that the company is transitioning from an investment company to that of an industrial conglomerate not unlike General Electric Company (NYSE:GE), the equity positions it holds in some of America’s biggest companies shouldn’t be overlooked.
I could probably list off 100 items to consider in Friday’s report, but I’ll make my life easier and yours by limiting my focus to five specific concerns.
Five Things to Mull Before Berkshire Earnings
What’s the Plan for Cash?
While Warren Buffett doesn’t have nearly the cash issues that Apple Inc. (NASDAQ:AAPL) faces, the greenbacks are piling up with Berkshire Hathaway holding $97 billion in cash and near-cash as of the end of March. You can expect that number to be about 10% higher in Q2 2017.
Buffett hinted at the company’s annual meeting in May that a regular dividend could be coming down the pike if it can’t find a way to invest a chunk of its existing cash stash in decent-sized acquisitions. He’s also not against buying back its stock but only if it were trading at 1.2 times book value or less. Right now it’s at 1.6 times book, so don’t hang your hat on share repurchases happening anytime soon.
Rather than discussing the company’s dividend plans, I’d rather hear about concrete ideas for extracting value from its cash such as increasing the size of its investment portfolio, etc.
How Are the Equities Doing?
I’m not talking about the market value of its equity holdings which stood at $135 billion as of the end of March, not including Berkshire Hathaway’s 27% stake in Kraft Heinz Co (NASDAQ:KHC).
I’m more interested in what it’s got up its sleeve regarding future investments like Kraft Heinz that give it a large minority position in well-run companies.
In May, the company asked the Federal Reserve to allow it to take a bigger position in American Express Company (NYSE:AXP). Currently, it owns 17% of the credit-card company. It wants to up that to 25%.
I’d like to see more of that.
You Can’t Forget Insurance
Not only is the float from Berkshire Hathaway’s insurance holdings a big reason it’s grown into such a massive conglomerate, but they also generate a significant amount of revenue and profits for the company.
In the first quarter, its insurance operations accounted for 35% of the company’s $65.2 billion in revenue and 16% of its net income, much of the revenue increase is a result of a retroactive reinsurance contract with American International Insurance Group Inc (NYSE:AIG).
Keep an eye on GEICO, a provider of automobile insurance that continues to take market share. In the first quarter, it grew premiums written by 16% over the same quarter a year earlier.
Berkshire stock currently trades at 2 times sales, a multiple that is deceptively small as a result of McLane Company, its wholesale distribution business that generates 19% of its revenue but only 2.2% of its profits.
If you back out McLane Company’s revenues, the price-to-sales ratio jumps to 2.5 times sales but loses little when it comes to the price-to-earnings ratio.
I’d like to see BRK.B sell McLane Company, an argument I first made in 2012. Warren Buffett paid $1.5 billion for the wholesale distributor in 2003. I’m not sure how much it could get for the company today, but I wouldn’t think a lot more than it paid.
It distorts the overall size of the business without adding any real value.
Analysts expect $1.88 in earnings per share, 7 cents less than the estimate from 90 days ago suggesting its overall business got a little weaker in the second quarter.
Year-over-year, analysts expect Berkshire earnings to be flat or 1 cent higher. However, the current full-year estimate calls for 4% YOY growth to $7.42 per share.
Bottom Line on Berkshire Hathaway
I’ve always felt that BRK.B’s quarterly and even yearly earnings numbers are somewhat irrelevant because the actual value of its shares is hidden within the various assets of its business.
Until an orderly sale of all its assets is conducted, earnings don’t tell the entire Berkshire Hathaway story.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.