- Berkshire Hathaway beat analysts' estimates for EPS and operating earnings in Q1 FY 2022.
- Operating revenue and earnings also were up YOY.
- Its investment portfolio posted a mark-to-market loss versus a large gain one year ago.
- At the annual shareholders meeting, Warren Buffett and Charlie Munger took aim at stock market speculation, Robinhood, Bitcoin, and inflation, among other matters.
|Berkshire Hathaway Earnings Results|
|Metric||Beat/Miss/Match||Reported Value||Analysts' Prediction|
|Earnings Per Share ($)||Beat||3,702||2,999.94|
|Operating Earnings ($B)||Beat||7.0||6.5|
Source: Predictions based on analysts' consensus from Visible Alpha
Berkshire Hathaway (BRK.A) Financial Results: Analysis
Berkshire Hathaway, Inc. (BRK.A, BRK.B) reported Q1 FY 2022 earnings that exceeded analysts' expectations. Earnings per share (EPS) were down by 51.5% year over year (YOY) but 23.4% better than analysts' forecasts.
Revenues for Q1 FY 2022 were $68.832 billion, down by 2.1% YOY and missing the estimate by 5.6%. Note that this revenue figure is the sum of operating revenues from Berkshire's operating subsidiaries ($70.810 billion) and the pretax loss on Berkshire's investments and derivative contracts (-$1.978 billion). In Q1 FY 2021, these figures were $64.599 billion and a gain of $5.700 billion, respectively, for a total of $70.299 billion.
In Q1 FY 2022, Berkshire Hathaway recorded an after-tax net loss of $1.580 billion on investments and derivative contracts. The company reported a gain of $4.693 billion in the same period of 2021.
Operating earnings, which exclude these gains, were $7.040 billion, compared to $7.018 billion in the same quarter of 2021. This was a slight improvement of 0.3% YOY but 7.7% above the estimate. The operating earnings figures that Berkshire reports are calculated after income taxes and exclude earnings attributable to non-controlling interests.
Berkshire spent approximately $3.2 billion on share repurchases (stock buybacks) in Q1 FY 2022. Buybacks included both its Class A (BRK.A) and Class B (BRK.B) common stock.
Over the past year, Berkshire Hathaway's shares have provided a total return of 20.8%, outperforming the S&P 500's total return of -0.3%.
BRK.A Operating Earnings
For many years, Chairman and CEO Warren Buffett has urged investors to focus on Berkshire's operating earnings from its wholly owned operating subsidiaries. These units encompass a broad spectrum of industries—most notably insurance, railroads, utilities, and energy.
However, pursuant to recent changes in GAAP reporting rules, the quarterly mark-to-market fluctuations in the value of Berkshire's investment portfolio must be reflected on the company's income statement, a rule that Buffett has criticized as introducing misleading volatility into the company's reported financial results. A prime example is indicated above, with Berkshire's after-tax earnings on its investment portfolio having lurched from a gain of $4.693 billion in Q1 FY 2021 to a loss of $1.580 billion in Q1 FY 2022.
As noted above, operating earnings increased from $7.018 billion in Q1 FY 2021 to $7.040 billion in Q1 FY 2022, an improvement of 0.3%. Increases were recorded across four of Berkshire's six major reporting segments. Railroads improved from $1.251 billion to $1.371 billion (+9.6%). Utilities and energy increased from $703 million to $750 million (+6.7%). Manufacturing, services, and retailing rose from $2.619 billion to $3.025 billion (+15.5%). "Other" (which includes goodwill and indefinite-lived asset impairment charges) went from $473 million to $677 million (+43.1%).
Meanwhile, insurance underwriting earnings dropped from $764 million in Q1 FY 2021 to $47 million in Q1 FY 2022 (-90.3%). Insurance investment income slid from $1.208 billion to $1.170 billion (-3.1%).
Underwriting earnings in Q1 FY 2022 were negatively affected by ongoing increases in claims severities at GEICO. By contrast, in Q1 FY 2021 premium reductions from the GEICO Giveback program were more than offset by lower claims frequencies for private passenger automobile coverages, despite higher claims severities.
Berkshire Hathaway's next earnings report, for Q2 FY 2022, is likely to be released on Saturday, Aug. 6, 2022. The release date for Q2 FY 2021 was Saturday, Aug. 7, 2021, and was announced on Aug. 5, 2021.
Annual Meeting Highlights
In addition to releasing Q1 FY2022 results on April 30, 2022, Berkshire also held its annual meeting of shareholders, led by Chairman and CEO Warren Buffett. As in past years, it was a marathon session, with the question and answer period lasting nearly five hours. Highlights are presented below.
Berkshire: A Work of Art
At one point late in the meeting, Buffett said: "I look at Berkshire as a painting. It's unlimited in size; it's got an ever-expanding canvas, and I get to paint what I want."
Buffett: 'Inflation Swindles Almost Everybody'
Buffett commented that inflation "swindles" equity investors. He later elaborated, in response to a question: "Inflation swindles the bond investor, too. It swindles the person who keeps their cash under their mattress. It swindles almost everybody."
He stated that inflation also raises the amount of capital that companies need and that raising prices to maintain inflation-adjusted profits is not as simple as it may seem. He opined that the best protection against inflation is investing in your own skills.
Later on, Buffett observed that massive economic stimulus during the COVID-19 pandemic is the major reason for high inflation today: "You print loads of money, and money is going to be worth less." Still, he also said that Federal Reserve Board (FRB) Chair Jerome Powell is "a hero ... He did what he had to do."
Buffett Decries Wall Street 'Gambling Parlor'
Buffett lambasted Wall Street for encouraging speculation in the stock market, effectively turning it into "a gambling parlor." In this vein, he also said, "They make a lot more money when people are gambling than when they are investing."
Buffett lamented that large American companies "became poker chips" for speculators. In particular, he took aim at the increasing use of call options, saying that brokers make more money from speculative bets made with these instruments than from simpler investing strategies.
Munger Slams Robinhood, Glad It's 'Unraveling'
Similarly, Buffett's longtime top lieutenant, Berkshire Vice Chairman Charlie Munger, took aim at online broker Robinhood Markets, Inc. (HOOD), Munger's list of indictments against Robinhood included "short-term gambling and big commissions and hidden kickbacks and so on."
Munger added: "It was disgusting. Now it's unraveling. God is getting just." Robinhood's shares are down by 88% from their high in August 2021, amid a declining number of users and a bigger-than-expected loss in the first quarter. Additionally, Robinhood is cutting about 9% of its full time employees.
Bitcoin: 'Just Say No' ... 'It Doesn't Produce Anything'
Munger took a thinly veiled swipe at Fidelity Investments for its recent announcement that it will allow Bitcoin (BTC) as an investment option in 401(k) plans. He advised: "When you have your own retirement account, and your friendly adviser suggests you put all the money into Bitcoin, just say no."
Later on, Buffett weighed in: "Whether it goes up or down in the next year, or five or ten years, I don't know. But the one thing I'm pretty sure of is that it doesn't produce anything. It's got a magic to it, and people have attached magic to lots of things."
Buffett continued to say that, if offered all the Bitcoin in the world for $25, he would not know what to do with it, and thus would not take it. Specifically, he noted that Bitcoin does not produce income, unlike, in his examples, farmland and apartment houses. Though he did not cite the greater fool theory, the drift of his comments was that it drives the price of Bitcoin.
Buffett: 'We Have Not Been Good at Timing'
In reply to a question, Buffett said: "We haven't the faintest idea what the stock market was gonna do when it opens on Monday." As a result, he continued, neither he nor Munger ever have made an investment decision based on a guess about what the market or the economy might do. "We don't know," he added.
Buffett admitted that "We have not been good at timing." On the other hand, he asserted, "We've been reasonably good at figuring out when we were getting enough for our money."
Ajit Jain: 'Progressive Has Done a Much Better Job Than GEICO'
Berkshire Vice Chairman Ajit Jain, who runs its insurance businesses, observed: "there's no question that recently Progressive [Corporation (PGR)] has done a much better job than GEICO ... both in terms of margins and in terms of growth." He elaborated: "There are a number of causes for that, but I think the biggest culprit is as far as GEICO is concerned … is telematics." Telematics uses a device to track driving patterns, in exchange for a lower insurance rate.
Buffett: 'So Much Trouble Finding Good Ideas'
Indicating that Berkshire is open to buying businesses worldwide, and not just in the U.S., Buffett said: "We have so much trouble finding good ideas that we can't afford to ignore any. But they do have to be sizable."
While noting that Berkshire actively seeks out excellent businesses to buy, Buffett said, "we actually prefer when they fall into our lap." That is, he is eager for the managers of such businesses to approach Berkshire.
Later on, Munger commented that, despite mounting concerns about Chinese stocks, he is willing to take some risks with them. He said: "I get so much better companies at so much lower prices, and I'm willing to take a little bit more risk to get into the better companies with the lower prices."
Merger Arbitrage With Activision Blizzard
Buffett noted that Berkshire now owns 9.5% of video game maker Activision Blizzard, Inc. (ATVI), starting with a $1 billion stake taken in the fourth quarter of 2021 based on the belief that it was undervalued. Then, in January 2022, Microsoft Corporation (MSFT) announced a bid to acquire Activision for $95 per share, a deal about which Buffett asserts having no prior knowledge.
Since then, Berkshire has been adding to its stake given that Activision, which closed at $76.50 on April 29, 2022, has continued to trade well below that bid. While Buffett acknowledged that the deal may face regulatory hurdles, he noted, "One thing we do know is that Microsoft has the money."
Meanwhile, Berkshire used the first quarter 2022 stock market selloff as an opportunity to add to its investment portfolio, putting more than $51 billion to work, most notably into shares of Chevron Corporation (CVX), Occidental Petroleum Corporation (OXY), and HP, Inc. (HPQ).
Berkshire Hathaway Inc. "First Quarter 2022 Earnings Release."
Berkshire Hathaway Inc. "Form 10-Q for the Quarterly Period Ended March 31, 2022," Page 4.
Investopedia. "Berkshire Hathaway Q1 FY 2022 Earnings Report Preview: What to Look For."
Berkshire Hathaway Inc. "Form 10-Q for the Quarterly Period Ended March 31, 2022," Page 23.
Berkshire Hathaway Inc. "Information Regarding Second Quarter  Earnings Release."
CNBC. "Warren Buffett Rips Wall Street for Turning the Stock Market Into 'a Gambling Parlor'."
CNBC. "Charlie Munger Says the Robinhood Trading App Is Justly 'Unraveling' for 'Disgusting' Practices."
Investopedia. "Fidelity Offers Bitcoin as 401(k) Investment Option."
Investopedia. "Berkshire Hathaway (BRK.A) Takes 11% Stake in HP (HPQ)."