Berkshire Hathaway is set to report its second-quarter financial results at 8 a.m. Eastern time on Saturday. While earnings will be a major factor, investors will also be closely watching stock buybacks, potential changes in the company’s major equity holdings, such as Apple and Chevron, as well as its cash levels.
Berkshire Class A shares (Ticker BRK/A) have had a solid year so far, rising nearly 14% in 2023. However, they still trail behind the 20% total return of the S&P 500 index. Currently priced at $533,018, the Class A shares are within 2% of their all-time high set in March 2022. On the other hand, Class B shares (Ticker BRK/B), which closed at $350.73 on Monday, are also just 2% away from their peak of $359.57.
Impact of Equity Holdings
Berkshire’s stock performance has been driven by significant appreciation in its $380 billion equity portfolio, primarily led by Apple. With Apple’s shares up around 50% this year, Berkshire’s stake in the company is now valued at approximately $180 billion. This accounts for nearly a quarter of Berkshire’s market value, which stands at $766 billion.
Anticipated Operating Earnings
Analysts forecast a decline of 11.5% in Berkshire’s operating earnings for the second quarter compared to the same period last year. The decline can be attributed to an artificial boost that last year’s second-quarter results received from the dollar’s rise against the yen, which reduced the value of Berkshire’s yen-denominated debt. The debt acts as a hedge for the company’s approximately $20 billion equity holdings in five Japanese trading companies, including Sumitomo.
UBS analyst Brian Meredith has an above-consensus estimate for the second quarter, projecting operating earnings of $5,981 per Class A share. In a recent note, Meredith pointed to higher profits expected from Berkshire’s Burlington Northern railroad unit, offset by some pressure on insurance earnings due to increased catastrophe insurance losses. The second quarter has been particularly challenging for the insurance industry, making it the worst in a decade.
As the eagerly awaited second-quarter results are revealed, market observers will be keenly observing Berkshire Hathaway’s financial performance and strategic decisions, looking for opportunities and insights into one of the world’s most renowned investment firms.
Berkshire’s Auto Insurance Business Faces Challenges
The second quarter of this year has proven to be challenging for Berkshire’s auto insurance business, Geico. According to projections by Meredith, Geico experienced an underwriting loss of approximately 3%, which is a significant decline compared to the underwriting profit in the first quarter. One of the contributing factors to this loss can be attributed to the increase in catastrophe losses.
The entire auto insurance industry has been grappling with elevated claims costs over the past 18 months, and as a result, Geico, along with its peers, has implemented substantial rate hikes in the double-digit range to offset these mounting expenses.
Stock Repurchases Reflect Buffett’s Confidence
Meredith predicts that Berkshire will engage in $2.2 billion worth of stock repurchases in the second quarter, down from the $4.4 billion in the first quarter. However, this figure still surpasses the stock repurchases made in 2022, where the company repurchased $7.9 billion worth of stock throughout the entire year. Investors closely monitor these buyback actions as they provide insights into CEO Warren Buffett’s perspective on the stock. Increased purchases generally indicate that Buffett deems the company’s shares to be undervalued.
Berkshire’s Holdings: Chevron and Apple
In the first quarter, Berkshire reduced its stake in Chevron by approximately 20%. This information was disclosed in Berkshire’s 10-Q report, which was released in May. Investors are eagerly awaiting updates on whether Buffett continued to reduce his Chevron holdings in the second quarter or potentially added to them. Additionally, Berkshire’s filing will shed light on any changes made to its massive Apple stake, which currently stands at about 915 million shares. The 10-Q report will specifically highlight Berkshire’s top five equity holdings at the end of the quarter.
Cash Reserves and Book Value
As of the end of the first quarter, Berkshire boasted $150 billion in cash reserves. It is highly likely that this figure has increased further by June 30, thanks to some sales of Activision Blizzard (ATVI) during the period. Edward Jones analyst James Shanahan estimates that Berkshire’s book value will rise to $370,000 per A share in the second quarter. This places the stock at a valuation of more than 1.4 times book value, slightly surpassing the five-year average. However, it is worth noting that book value likely increased in the current quarter due to the rise in Apple stock. Shanahan’s estimates indicate that the current book value is approximately $375,000 per class A share.