Berkshire Hathaway’s operating profitswere better than they looked in the company’s earnings release Saturday due to a swing incurrency-related earningsthat ought to be stripped out of the profit report.
Berkshire Hathway earnings were fine once currency swings were removed.
Berkshire said its after-tax operating profits, excluding investment gains and losses, were down 6% to $10.1 billion in the third quarter, or about $7,019 per class A share, 4% below the FactSet consensus. The third-quarter earnings were also below the record $11.6 billion in the second quarter.
Adjust for the currency swing and Berkshire’s earnings were up about 8% to $11.2 billion in the third quarter.
Adjust further for a one-time pretax expense of about $500 million before taxes related to the bankruptcy of a business controlled by one of Berkshire’s insurance companies, and the earnings were close to the second-quarter total.
Berkshire does separate calculations of its total earnings and its operating profits excluding one-time investment gains in its earnings press release. CEO Warren Buffett tells investors to focus on the operating profits because they’re a far better gauge of the company’s underlying earnings. A similar adjustment ought to be made for currency movements.
Berkshire suffered a $1.1 billion noncash loss after taxes in the third quarter as a result of the dollar’s decline in the period, which lifted the value of more than $20 billion in nondollar debt.
An increase in the value of a liability is a negative and thus depressed earnings based on accounting rules. But the reality is that currency swings bounce around from quarter to quarter. They were a positive $1 billion in the first half of the year and likely will be positive in the current quarter due to the dollar’s rally against the yen. They have no bearing on Berkshire’s earnings power.
Barron’s flagged the impact of the currency swing in our article on the profit report Saturday and we wrote in our earnings preview that Berkshire could suffer a $1 billion currency hit in the period.
“Just as short-term movements in equity prices can distort the reporting of operating profits, so to do currency swings on debt outstanding,” wrote Chris Bloomstran, the chief investment officer of investment firm Semper Augustus who follows Berkshire closely. “Both should be excluded from an analysis of operating and economic profit.”
Berkshire now trades for about 1.55 times its Sept. 30 book value and for around 22 times its annualized adjusted operating profits after taxes in the first half of 2024, Barron’s estimates. Berkshire’s Class A stock ended Friday at $678,000 and is up 25% this year, ahead of the S&P 500 index’s total return by about three percentage points.
A sizable chunk of Berkshire’s yen debt supports its equity holdings of more than $20 billion in five Japanese trading companies. Berkshire essentially is borrowing cheaply in yen at under 2% and financing the purchase of the trading companies, which have much higher earnings “yields,” or earnings divided by stock prices. That was part of Buffett’s shrewd strategy in buying those stocks, which more than double Berkshire’s overall cost. Berkshire began buying them five years ago.
Berkshire’s third-quarter profits include some notable positives, including a doubling in underwriting profits to $2 billion before taxes at the company’s Geico auto insurance unit.
After-tax profits at the Burlington Northern Santa Fe railroad unit were up 13% to $1.4 billion and Berkshire Hathaway Energy, the big utility unit, saw a threefold increase in profits to $1.6 billion after taxes in the quarter from depressed levels in the year-earlier period.
Insurance investment income rose almost 50% to $3.7 billion after taxes helped by a sharp increase in Berkshire’s cash and equivalents to a record $325 billion in the period.
The cash total, however, is overstated by about $15 billion since Berkshire owes that amount for Treasury bills purchased at the end of the third quarter. Berkshire held $288 billion of T-bills on Sept. 30. Buffett prefers to hold the bulk of Berkshire’s cash in ultrasafe T-bills.
The $15 billion liability for the T-bills was noted by Bloomstran.