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Berkshire Hathaway Earnings: Here's What You Need to Know

By Matthew Frankel, CFP® - May 4, 2019 at 9:02PM

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Don't pay too much attention to the bottom-line number.

While its widely followed annual shareholder meeting was the big news of the weekend, Berkshire Hathaway (BRK.A 0.10%) (BRK.B -0.03%) also released its first-quarter earnings. Because of its massive stock portfolio, Berkshire's bottom-line earnings figure is rather meaningless, but there are still a few other things you should know.

Berkshire's (meaningless) earnings number

Berkshire Hathaway generated net income of $21.7 billion for the first quarter of 2019. This translates to $13,209 per Class A share or $8.81 per Class B share. At first glance, this may seem like great news. After all, Berkshire recorded a net loss of $1.1 billion in the first quarter of 2018.

However, keep in mind that Berkshire Hathaway's earnings include the unrealized gains and losses from its stock portfolio. In other words, if the stock portfolio gains $10 billion in value, this will be reflected in the company's earnings, even though it didn't "earn" anything.

Warren Buffett smiling and speaking with reporters.

Image source: The Motley Fool.

The S&P 500 increased by 13% during the quarter, so stock price appreciation made up the lion's share of Berkshire's earnings -- $15.1 billion of the $21.7 billion total. Buffett himself has called Berkshire's earnings figures meaningless, so take these numbers with a big grain of salt.

Berkshire's actual earnings

Now that we've discussed the numbers that really don't reflect Berkshire's performance, here's the number that does a better job of telling the story.

Berkshire's operating profit for the first quarter (the income generated by its businesses) came in at $5.56 billion as compared with $5.29 billion in the same quarter a year ago.

How much cash does Berkshire Hathaway have?

Berkshire had about $112 billion in cash and equivalents at the end of 2018. Now the cash hoard has swelled to $114.2 billion. Buffett insists on keeping at least $20 billion in cash at all times, so this leaves nearly $95 billion in usable cash.

It's worth pointing out that after the quarter ended, Berkshire agreed to invest $10 billion in Occidental Petroleum, so it's likely that the cash hoard will actually shrink in the second quarter. However, finding ways to use Berkshire's cash remains an issue, as Buffett has complained about a lack of reasonably valued investment opportunities.

Accelerated buybacks

During the first quarter, Berkshire bought back $1.7 billion of its own stock. This is more than Berkshire spent in the final six months of 2018, so buybacks definitely accelerated. Even so, with so much cash in the bank, many investors were hoping to see buybacks on a far larger scale. After all, $1.7 billion represents well under half of 1% of the company's outstanding shares.

Buffett recently commented that Berkshire could end up repurchasing $100 billion of stock, but at the company's annual meeting, he reiterated that buybacks are dependent on valuation -- not the company's cash hoard. In other words, if the stock gets significantly more attractive, Buffett will be more aggressive with buybacks.

One thing we don't know yet

Perhaps the biggest thing investors want to know about Berkshire Hathaway are the moves made in its stock portfolio. Unfortunately, those aren't included in the earnings report.

Berkshire reports its common stock holdings in its 13-F filings, which aren't due until 45 days after the end of each quarter. (Expect the first-quarter 13-F by May 15.) So we'll have to wait until then to find out what moves Berkshire made in its closely watched stock portfolio.

The bottom line on Berkshire's first quarter

To sum it up, even though the performance of Berkshire's stock portfolio greatly distorted the company's stated earnings, the first quarter was still a solid one for Berkshire and its investors. Operating income growth was strong and Berkshire decided to significantly increase its buybacks, which indicates that Buffett and Vice Chair Charlie Munger thought the stock was attractive.

Going forward, shareholders should watch to see if the recently announced $10 billion investment in Occidental is the first of several big investments, as the cash hoard has been a drag on Berkshire's returns for too long.

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