Berkshire Hathaway: Strong Operating Earnings Expected

Berkshire Hathaway, led by Warren Buffett, is anticipated to report stronger operating earnings in the third quarter despite a potential loss in the stock market's equity portfolio. The company's results, set to be released on Saturday at 8 a.m. ET, provide investors with ample time to analyze and digest the information before trading commences on Monday.

Projected Operating Profits

FactSet analysts forecast a gain of approximately 23% in operating profits for the third quarter, amounting to $6,540 for each class A share. This translates to an estimated after-tax operating income of around $9.5 billion, excluding unrealized equity portfolio losses and other investment results.

Factors Influencing Earnings

Higher interest rates have potentially buoyed Berkshire Hathaway's operating profits, primarily due to increased interest income derived from its substantial cash balance of nearly $150 billion. The majority of these funds are invested in Treasury bills that currently yield over 5%.

Insight from Stock Repurchases

Berkshire's stock repurchases hold considerable significance for investors as they provide insight into Buffett's perspective on the appeal of the company's shares. Second-quarter repurchases stood at $1.4 billion, a decline from $4.4 billion in the previous quarter. Reportedly, Berkshire only bought back approximately $100 million worth of stock in July, indicating relatively light buyback activity during the third quarter.

Underwriting Profits and Insurance Operations

Berkshire's massive property and casualty insurance operations may witness higher underwriting profits in the third quarter. Additionally, the company might recognize profits from a significant $15 billion policy covering Florida hurricanes, attributed to minimal storm activity during this period.

Challenges in Predicting Earnings

Forecasting Berkshire's earnings is no easy task due to its immense size and complexity. With dozens of businesses under its umbrella and Buffett's steadfast refusal to provide guidance, predicting the company's financial performance can be challenging.

Unique Approach to Investor Communication

Notably, Berkshire stands out among other major corporations as it does not conduct quarterly conference calls. While some argue that such communication would be beneficial for investors, Buffett has consistently resisted the idea. Consequently, Berkshire Hathaway receives limited analyst coverage.

Housing-Related Businesses and Railroad Unit

James Shanahan, an analyst at Edward Jones, suggests that Berkshire's housing-related businesses might experience some weakness due to higher interest rates. In addition, earnings for Burlington Northern Santa Fe, the company's substantial railroad unit, could potentially be lower based on weaker results reported by its main competitor, Union Pacific (UNP).

Berkshire Hathaway's Focus on Operating Profits

In a recent earnings release, Warren Buffett, the CEO of Berkshire Hathaway, advised investors to disregard headline earnings figures and instead pay attention to the company's operating profits. He specifically highlighted the need to exclude changes in the value of Berkshire's $350 million equity portfolio, as these fluctuations can distort the true financial performance.

Buffett emphasized that the amount of investment gains or losses in a given quarter is usually inconsequential and can mislead investors who lack expertise in accounting. Such figures often result in misleading net earnings per share, hence Buffett's call to focus on operating profits instead.

Despite the equity portfolio's weak performance in the third quarter, Berkshire's Class A stock has shown resilience. It has risen approximately 11.5% this year, aligning with the total return of the S&P 500 index. The dominance of Apple within Berkshire's equity portfolio has had a significant impact on its performance. As Apple stock plunged 12% in the third quarter, the value of Berkshire's sizable stake declined by about $20 billion.

Bank of America (BAC), American Express, and Coca-Cola are other major holdings in Berkshire's stock portfolio that also experienced declines during the same period. Analysts predict further declines in the current quarter.

Despite these setbacks, Berkshire's book value per share declined by only 4% in the third quarter, reaching $359,000 for a class A share. This translates to a price/book ratio of approximately 1.45, which is consistent with the average over the past two years.

Shanahan, a notable industry expert, expects an increase in Berkshire's cash holdings due to equity sales and operating profits. While cash stood at around $147 billion on June 30, it is projected to surpass $150 billion by September 30 - a record high for the company. Additionally, Berkshire made a significant acquisition in the natural-gas sector, investing around $3 billion during the specified period.

Operating profits continue to accumulate on Berkshire's balance sheet as the company does not pay dividends unless they are invested elsewhere.