Berkshire Hathaway third-quarter earnings and book value estimates (NYSE:BRK.A)

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Berkshire Hathaway (NYSE:BRK.A) (NYSE: BRK.B) The third quarter was likely a “steady-as-you-go” type of quarter, with limited inventory, a flat equity portfolio, and operating activity facing headwinds for the first time in a while.

Berkshire Hathaway Award
Data by YCharts

Berkshire ended the third quarter down 7.5% from its 52-week high of $295 on May 10.

Third Quarter Holdings Update

The value of Berkshire’s investments in non-Kraft Heinz (KHC) equity securities rose 1% to $297.7 billion from $294.5 billion last quarter.

Berkshire

From the gain of $3.2 billion, after increasing the future tax liability on the balance sheet as “income taxes, primarily deferred” and subtracting 21%, we see a net book value gain of 2 .5 billion for the third quarter.

Third quarter operating profit

Berkshire Hathaway third-quarter operating profit

Third quarter results should be strong, although I expect impacts from both Hurricane Ida and supply chain disruptions.

Insurance underwriting is expected to produce an underwriting loss due to Hurricane Ida. According to current insurance estimates, Ida caused $30 billion in damage, similar to Hurricanes Ida and Harvey which both hit in the third quarter of 2017. In this neighbourhoodBerkshire posted an underwriting loss of $1.4 billion.

I will estimate a $800 million underwriting loss for this quarter.

Insurance investment income should happen $1.2 billion, driven by increased investment in dividend-paying equity securities. The $1 billion burden from lower interest rates on short-term debt is almost fully annualized at this point, and investment income is expected to slowly increase over the next few quarters.

Rail, Utilities and Energy should show small gains over last year. Rail volumes at BNSF is up 4% compared to the same week in Q2 and up 5% compared to last year. For BHE, the third quarter is the strongest seasonal period, and the additional revenue from the Dominion deal should translate into reasonable year-over-year gains. While the Dominion deal was small, around $6 billion after Berkshire and Dominion scrapped part of the deal over antitrust issues, it certainly looks like a winner given the strength of the natural gas market.

I estimate $3 billion in the income of this group.

Other companies containing dozens of companies like Precision Castparts, Lubrizol, Marmon and other industrial companies, should post year-over-year gains, although I expect supply chain disruptions and rising raw material prices affect profitability from the second quarter.

I will estimate $2.7 billion revenue for this group, down 10% compared to the last quarter.

Other should produce a $300 million Gain as equity gains from Kraft Heinz and Pilot, along with the strength of the U.S. dollar, offset the usual expenses (mainly amortization of past acquisitions.)

In total, I expect Q3 operating profit around $6.4 billion.

Current book value

As reported in 2021 Berkshire Q2 10-Q the book value as of June 30, 2021 was $470 billion.

Adding the $2.5 billion net gain from equity investments to $6.4 billion in operating profit, I project the Q2-21 book value to $479 billion.

Berkshire Hathaway price at book value

Berkshire’s market capitalization as of September 30 was $619 billion. Dividing that by $479 billion yields a price/book value of 1.29x for Q3.

Outlook and recommendations for 2021

Berkshire Hathaway is trading slightly ahead of the S&P 500 for the year and roughly flat with the latest quarter.

Berkshire Hathaway vs. S&P 500
Data by YCharts

That still works for me, because I think the main driver of future Berkshire returns is the ability to buy back shares at a fair valuation. Berkshire repurchased $6 billion worth of stock in the second quarter, a deceleration from the end of last year.

Berkshire Hathaway Share Repurchase

Berkshire repurchased $3.4 billion worth of shares in June at $280/share. Berkshire has been trading below that level for most of September, so hopefully redemptions have accelerated back to the $9 billion-per-quarter level since late last year, especially with cash levels virtually unchanged since then.

Berkshire Hathaway Share Repurchase

Speaking of money, Buffett had the following to say about it:

The only thing I will tell you is that the worst investment you can have is cash. Everyone talks about money being king and all that kind of stuff. Silver will lose value over time… Silver is a bad investment over time.

With CPI up 5.3% from a year ago and short-term Treasuries yielding less than 1%, Berkshire’s $144 billion in cash and short-term investments lost about $6 billion in actual purchasing power over the past 12 months. Hopefully this will spur Berkshire to become even more aggressive with stock buybacks in the future.

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