Summary
- Reported earnings are volatile, due to new reporting requirements of investment gains/losses.
- Warren Buffett is very conservative in managing Berkshire Hathaway. The company has a strong balance sheet with a lot of cash on hand.
- The company is valued at least $310,000 per A share.
Berkshire Hathaway (BRK.A) (BRK.B) has just recently reported earnings for the first quarter of 2020. The total revenue came in at $61.27 billion, missing earnings estimate by $1.87 billion. The conglomerate has produced staggering losses of $30.7 billion. While many investors might take first-quarter earnings losses as a bad sign, we think the quarterly losses do not matter much, and Berkshire Hathaway is always a good choice for long-term investors.
Volatility in reported earnings was due to new reporting requirements
In the first quarter of 2020, most of Berkshire Hathaway’s segment revenues, including BNSF, Berkshire Hathaway Energy, Manufacturing, and Service and Retailing business, are declining. The only segment which produced growing revenue was the insurance segment. Its insurance revenue came in at $17.4 billion, a 10% year-over-year growth. GEICO, one of the biggest national auto insurance companies, increased revenue by 5.7% to $9.11 billion.
The first-quarter losses resulted from the $55.6 billion losses from investment. These are unrealized, temporary losses. Under old GAAP accounting rule, Berkshire Hathaway did not have to include unrealized gains/losses in reported earnings, the unrealized losses only had to be recorded in earnings if they were “other than temporary” losses. Since 2018, the company has to include mark-to-market unrealized gains/losses in reported earnings. As a consequence, the short-term volatility from the stock market has been reflected in Berkshire Hathaway’s reported earnings, causing massive fluctuations in the company’s GAAP earnings.
Source: Berkshire Hathaway’s 10-K filing
From 2015-2017, Berkshire Hathaway’s net gain/losses in the investment and derivatives were not so significant, ranging from $1.34 billion to $6.73 billion. With the previous reporting requirement, investment gains/losses occurred mainly from the divestments and redemptions, not the unrealized gains/losses. Since 2018, when the new reporting requirement has come in place, Berkshire Hathaway’s reported earnings have been extremely volatile.
Source: Berkshire Hathaway’s 10-K filing
In 2018, it recorded net losses from investment and derivatives of more than $17.7 billion, bringing down the net earnings attributable to Berkshire Hathaway to only $4 billion. In 2019, with the overall strong rising stock market, the unrealized net gains from investment and derivatives reached more than $54.7 billion, leading to $81.4 billion in earnings. Because of the change in reporting requirements, Berkshire Hathaway experienced a 1,900% year-over-year earnings growth in 2019, without much change in business fundamentals. Therefore, what investors should do is to ignore those short-term investments and derivative gains/losses, but focus on operating earnings.
