What Happened

Berkshire Hathaway published Q3 2019 earnings on November 2nd. It reported $10,119 a share in earnings according to generally accepted accounting principles (GAAP), a significantly positive surprise. Like a lot of recent earnings surprises from Berkshire, this surprise has been driven in part by a change in how GAAP earnings are computed. The change requires Berkshire to factor in the change in value of stock holdings the company owns into their earnings, regardless of whether they've sold them or not. This is called an unrealized gain or loss. As Berkshire holds an enormous amount of stock, this can result in fairly large swings in earnings. Case in point, it resulted in a huge $15 billion loss in Q4 2018, which is still weighing down Berkshire's return on equity.

Another takeaway from Berkshire's report is that it's sitting on an enormous amount of cash, both on its balance sheet and through its insurance float. Float is the money insurance companies get in premiums that they haven't had to pay out yet, which they can invest. It's been a while since Berkshire has made a large acquisition, so be on the lookout for what they might do with this enormous cash pile.

(Below is Investopedia's original earnings preview, published 10/31/19)

What to Look For

Berkshire Hathaway (BRK.A) and longtime CEO Warren Buffett have had a turbulent year, with investors broadly criticizing top management for lagging stock performance and failure to spend enough of Berkshire's giant cash horde on stock buybacks. Now, as the company prepares to release its Q3 2019 earnings report on November 1, investors will look closely at several metrics to measure the company's performance, including growth in return on equity (ROE).

Analysts expect a difficult quarter. Berkshire will report earnings of $4,594 per share (EPS) for the company's Class A shares, which would be a sharp drop in GAAP earnings on declining revenue compared to the same quarter a year earlier, according to consensus estimates. Berkshire Hathaway's shares have dramatically underperformed the S&P 500 in the past 12 months and also in recent years.

Berkshire Hathaway

In prior quarters this year, Berkshire Hathaway's revenue has remained relatively flat on a sequential basis (following an uncharacteristically low Q4 2018), with a modest decline from Q1 2019 to Q2 2019. EPS followed a similar pattern, declining slightly from Q1 to Q2 after recovering from an aberrant Q4 2018. In the most recent quarter, GAAP earnings per share was $8,608, a surprise of 128.1%, on revenue of $63.6 billion. After these earnings were released, Berkshire stock reacted by declining slightly. This quarter's expected EPS is $4,594, a marked drop from Q2 and drastic decline from $11,280 in Q3 of 2018. The estimated year-over-year earnings decline in Q3 is expected to be much steeper than the fall in revenue to $65.85 billion.

Berkshire Hathaway Key Metrics
  Estimate for Q3 2019 Q3 2018 Q3 2017
Earnings per share $4,594 $11,280 $2473
Revenue (in billions) $65.85 $78.16 $60.47
Return on Equity N/A 17.83% 6.43%
Berkshire Hathaway Earnings for Q3 2019

For a massive holding company like Berkshire Hathaway, a key to success is how well the business uses its capital to invest and generate earnings growth. ROE, a measure of financial performance calculated by dividing net income by shareholders' equity, is a useful metric to measure this. As with Berkshire's revenue and EPS, ROE in recent quarters has fluctuated significantly. Between Q3 2017 and Q3 2018, the figure nearly tripled to 17.83%. However, in Q2 2019 ROE fell by more than half to 7.87%. The weak Q2 number could be difficult to top in Q3. That's due in part to Berkshire's small share buyback program and to its costly losing bet on the merger that became Kraft Heinz Co. (KHC. While many of Berkshire's individual companies have performed well in recent years, their earnings may not be strong enough to dramatically bolster Berkshire's results in Q3.