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Berkshire Hathaway Earnings Preview: What to Watch

By Matthew Frankel, CFP® – Updated Aug 2, 2019 at 9:00AM

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Berkshire's second-quarter earnings report is due Saturday. Here's what to keep an eye on.

Massive conglomerate Berkshire Hathaway (BRK.A -0.96%) (BRK.B -0.86%) is set to release its second-quarter earnings report. As usual, the company is planning to issue its report over the weekend, on Saturday, Aug. 3.

With that in mind, there are a few things that investors should be aware of, and some very interesting things they should keep an eye on when the report comes out.

Warren Buffett smiling.

Image source: The Motley Fool.

Berkshire's bottom-line earnings number is rather meaningless

Before you read Berkshire's second-quarter earnings report, it's important to keep in mind that the company's bottom-line earnings per share number should be taken with a big grain of salt.

Specifically, Berkshire is forced to include unrealized gains and losses from its massive stock portfolio in its earnings calculations. In other words, if the company's stock portfolio declines in value by $5 billion, this will negatively impact earnings, even though Berkshire didn't actually "lose" any money.

The number that's more important is Berkshire's operating profit. This is the income produced by Berkshire's business operations and gives a much more accurate picture of how the company is doing.

Cash is king

Ever since the early 2016 acquisition of Precision Castparts, Berkshire has had a difficult time finding major acquisition opportunities. Simply put, Warren Buffett and Vice Chairman Charlie Munger have generally found that valuations are far too high.

As a result, the amount of cash that is sitting on Berkshire's balance sheet has been on an uptrend for some time, and one of the most interesting numbers to watch will be the size of Berkshire's war chest of cash at the end of the second quarter.

As of March 31, Berkshire had $114.2 billion of cash and equivalents. And while the company likely found at least some opportunities in the stock market during the quarter (more on that in a bit), it's rather likely that the cash stockpile got even larger. After all, Berkshire committed to invest $10 billion in Occidental Petroleum during the second quarter, but this is contingent on Occidental's completed acquisition of Anadarko Petroleum, which has yet to be finalized. Aside from that, there was no major outflow of cash from Berkshire's accounts that we know of.

Did Berkshire ramp up its buybacks?

Speaking of cash outflow, here's one area where investors could potentially get a surprise. During the first quarter, Berkshire spent $1.7 billion on buybacks, which was a significant acceleration compared with the second half of 2018, when Berkshire's new buyback program went into effect.

As you can see from the chart below, there were times during the second quarter when Berkshire's stock price dipped below the roughly $201 average price the company paid to buy back stock during the first quarter. So I wouldn't be surprised to learn that the company spent significant cash on buybacks during the second quarter as well, especially since Berkshire didn't make any major acquisitions.

BRK.B Chart

BRK.B data by YCharts.

Unfortunately, the (potentially) exciting part will come later

One thing not to expect in Berkshire's earnings report is any news about the company's stock portfolio. Based on the change in Berkshire's cash position, we'll have a pretty good idea about how much net capital the company spent on stocks during the quarter, but we'll have to wait until Berkshire's latest 13-F filing is released on Aug. 15 to find out exactly what Berkshire bought and sold during the second quarter.

We recently learned that Berkshire added significantly to its Bank of America investment, but all we know is that Berkshire owned 950 million shares of the bank on July 17. It's unclear whether those purchases took place before or after the end of the second quarter. The point is that when it comes to Berkshire's stock portfolio, we simply won't know for a couple weeks.

Matthew Frankel, CFP owns shares of Bank of America and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has the following options: short January 2021 $200 puts on Berkshire Hathaway (B shares) and long January 2021 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

Stocks Mentioned

Berkshire Hathaway Stock Quote
Berkshire Hathaway
$472,500.01 (-0.96%) $-4,584.99
Berkshire Hathaway Stock Quote
Berkshire Hathaway
$313.12 (-0.86%) $-2.72

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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