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Berkshire Hathaway Lost $1.1 Billion in the First Quarter -- or Did It?

By Motley Fool Staff - May 10, 2018 at 1:16PM

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The Warren Buffett-led conglomerate reported a large loss, but there's more to the story.

Thanks to new accounting rules, Berkshire Hathaway's (BRK.A 0.03%) (BRK.B 0.00%) record first-quarter operating profit looks like a $1.1 billion loss. Confused? In this Industry Focus: Financials clip, Michael Douglass and Matt Frankel break down Berkshire's first-quarter numbers for you.

A full transcript follows the video.

This video was recorded on May 7, 2018.

Michael Douglass: The first thing we're going to talk about today is the fact that Berkshire actually reported a loss in earnings in the documentation leading up to the conference.

Matt Frankel: Yeah. Buffett said in his letter this year, about three months ago, that shareholders shouldn't pay much attention to Berkshire's earnings going forward. Basically, there's an accounting change now that requires what they call unrealized gains on investments, meaning stocks they haven't sold yet, to be included in earnings figures. As most listeners know, the stock market did not have a great first quarter to 2018. This was especially true for some of Buffett's stocks. Wells Fargo had a particularly bad time. Coca-Cola, Kraft Heinz are all doing pretty poorly. This made Berkshire look like they lost over $1 billion, when in reality, their operating earnings, which is the earnings that are actually being generated by its businesses, grew to a record high level, up almost 50% year over year. It was actually about a $5 billion profit, and the change in value of the company's stock portfolio made it look like a loss.

Buffett had some comments. He reiterated his point that investors should not be too concerned with any one quarter's or even any one year's earnings, just because it includes figures from investments that Berkshire hasn't sold yet, and for all we know, has no plans to sell any time soon.

Douglass: Right. And one of the key things to really think about here is that a lot of people, I think, look at companies on a fairly general view, they look really at just top and bottom line numbers -- so, revenue and earnings per share, or revenue and net income, or something like that. Particularly when the stock market goes south, and you see someone's net income go down, their earnings per share go down, then you get a little bit nervous about that company. The thing with Berkshire is, you're really not going to want to watch that when the stock market goes down because they're absolutely going to show really terrible earnings per share. But that's going to be because of all of these investments weighing down what's fundamentally a very strong business.

Frankel: Right. This accounting change affects all companies, but there's no other companies -- that I know of, at least -- with $180 billion stock portfolio. This is really a Berkshire-specific accounting change, in many ways.

Douglass: Yes. And I would say, maybe, Markel. I mean, they don't have a $180 billion portfolio, but they have a fair amount, and a lot of their stocks are fairly high-flying tech names. Markel is, in many ways, structured very similarly to Berkshire. It's not nearly the scale. It's also from my hometown, Glen Allen, Virginia. Anyways, the point is, it's structured similarly, so you would probably see a similar issue for them.

But, yeah, this is just something that's going to really affect these two companies, I'd say, going forward. It's just something you're going to have to keep in mind, particularly when the stock market swoons or goes up. You're really going to want to look at that underlying business performance and strip out the investment side of it.

Matthew Frankel owns shares of Berkshire Hathaway (B shares). Michael Douglass owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Markel. The Motley Fool has a disclosure policy.

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