Berkshire Set For Bumper Earnings Despite Broader Underperformance

By Glenn Dyer | More Articles by Glenn Dyer

We know Warren Buffett’s Berkshire Hathaway will report one of its worst annual performances viz a viz the S&P 500 index when it reveals its 4th quarter and full-year figures in early February.

But reported earnings, including massive capital gains, could reach a record $US100 billion, or even top that figure. It all depends on the size of the massive gains in the final three months of 2019 when the S&P 500 surged 8.5% (including a 2.9% gain in December alone).

That could see Berkshire Hathaway earn more than any of the companies it invests in – including Apple.

Berkshire shares rose by 11% in the year to December 31 (for the A-class shares which ended the year on $US339,590), compared with the 28.4% rise in the S&P 500 index and the 31.5% total return (including dividends).

Berkshire compares its performance two ways – per share market value and per-share book value. Seeing the company has been buying back shares in recent months, the actual performance could be a bit more than the 11% rise in the share price.

But it will still be seriously weaker than the wider market, although there probably is a bit of catch up seeing 2018 saw the company report a stellar year – the per-share market value leapt 20.5% against the modest 9.7% rise in the value of the S&P with dividends included.

Seeing Berkshire doesn’t pay dividends, the more accurate comparison is with the performance in the share index alone but by any measure, there’s daylight between the rise in the market and the rise in the company’s share price.

The book value per share though might reveal a much stronger performance because of the sharp rise in the value of Berkshire’s huge share portfolio.

Back of the envelope calculations show that thanks to strong rises by some key Buffett favourites – led by Apple and Bank of America, in the final three months of the year.

Apple shares leap 31% in the final quarter – boosting the value of the Berkshire holding by billions of dollars to $US73 billion from $US57 million at the end of the September quarter.

This though depends on whether Berkshire topped up its Apple holding in the quarter, as it has done off and on for the past year or so.

Berkshire also saw rises in the value of other key investments in the fourth quarter led byBank of America (up 15%), Wells Fargo, up 11%, Amex, up 10%, Goldman Sachs, up 16%, Coca Cola, up 4%, JPMorgan Chase, up 23% and US Bancorp, up around 11.8%. The troubled investment of more than 26% in struggling Kraft Heinz improved by 15% in value in the quarter.

All up the value of the company’s portfolio could have risen by as much as $US50 billion to more than $US250 billion.

Berkshire’s operating businesses total more than 90 – and include a huge insurance, led by Geico (the second biggest US car and property insurer), and massive and reinsurance businesses; there’s the Burlington Northern Santa Fe railroad, Berkshire Hathaway Energy, Castaway Parts, big retailing, food, property, mobile housing, car sales, food distribution, and ancillary businesses.

These are expected to produce post tax earnings of around $US25 billion for the full year.

Under recent changes to US accounting rules the high capital gains will boost the 4th quarter and full-year earnings just as the losses in the final quarter of 2018 saw earnings slide.

Berkshire earned $US4.0 billion in 2018 -made up of $US24.8 billion in operating earnings, a $US3.0 billion non-cash loss from an impairment of intangible assets (arising almost entirely from the 26% plus stake in Kraft Heinz), $US2.8 billion in realised capital gains from the sale of investment securities and a $US20.6 billion loss from a reduction in the amount of unrealised capital gains on the share portfolio (which ended 2018 with a fair value of $US at just on $US173 billion).

That means the company could report annual earnings of $US100 billion or more on the latest accounting basis.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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