ii view: stock slump turns Berkshire Hathaway's profit into big loss

Shares for this US conglomerate have comfortably outperformed the S&P 500 index year-to-date. Buy, sell, or hold?

Second-quarter results to 30 June 

• Operating earnings up 39% to $9.28 billion (£7.7 billion)
• Net loss attributable to shareholders of $43.7 billion, down from earnings of $28 billion
• Cash held of just over $100 billion 

ii round-up:

Warren Buffett's Berkshire Hathaway Inc Class B (NYSE:BRK.B) conglomerate reported an improvement in business operating profit, but posted an overall net loss when allowing for the slump in the value of its investments. 

Operating earnings of $9.28 billion (£7.7 billion), which excludes investment portfolio losses, rose 39% year-over-year, as businesses from insurance and railroad operations to building products manufacturing continued to recover from the prior pandemic. 

But an overall net loss attributable to shareholders of $43.8 billion (£36.3 billion) came as investment portfolio losses of $53 billion (£44 billion) followed a downturn in markets this year following Russia's invasion of Ukraine, rocketing inflation, higher interest rates and recession fears. 

Berkshire shares are down by close to 3% year-to-date, the S&P 500 index is down by more than 13%, while shares for Apple (NASDAQ:AAPL), the biggest US company, have fallen by around 9%. 

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The climb in Berkshire’s operating earnings, Mr Buffett’s preferred assessment of performance, came as its non-underwriting insurance business posted a 56% increase in profit to $1.9 billion. Profit for its railroad operations increased to $1.66 billion from last year’s quarterly $1.52 billion.

The Omaha Nebraska headquartered company, which operates over 90 businesses, bought back a further $1 billion of its own stock during this latest quarter, much less than the $3.2 billion purchased the previous quarter. 

Broker Morgan Stanley reiterated its equalweight stance on the shares following the results, with an estimated fair value target of $367 per ‘B’ class share ahead of the current price at under $300 per ‘B’ class share. 

ii view:

Led by legendary investor and businessman Warren Buffett, Berkshire Hathaway is tracked and invested in by large and small investors alike. Berkshire, which Buffett has run since 1965, engages in a range of business activities including insurance and reinsurance, utilities and energy, and the manufacture of consumer and building related products. 

For investors, an uncertain economic outlook clouded by a cost-of-living crisis for consumers and expected further interest rate rises, cannot be ignored. The eventual departure of Buffett from the business may well dampen investor enthusiasm, while elevated inflation and rising costs for businesses generally also warrants consideration. 

More favourably, some value buying opportunities have been found, such as its $11.6 billion acquisition of insurer Alleghany in March, with its considerable cash mountain of over $100 billion offering scope for further bargain hunting. Investment opportunities, if not full takeovers in recent years, have included a growing stake in Occidental Petroleum Corp (NYSE:OXY), Hewlett Packard Enterprise Co (NYSE:HPE), Bank of America (NYSE:BAC), and Apple, while its ongoing share buyback programme continues to offer support.

On balance, and with the distorting impact of previous central bank action still arguably very much in play on global asset prices, the judgement and experience offered by Mr Buffett’s Berkshire company remains highly reassuring.   

Positives: 

• Diverse portfolio of industries and businesses
• Company chairman Warren Buffett is regarded by many as a legendary investor and businessman 

Negatives:

• Subject to macro-economic and geopolitical uncertainties
• Management succession risk - Mr Buffett is in his 90’s

The average rating of stock market analysts:

Strong hold