What Happened

Berkshire Hathaway reported significantly higher profits than expected, due to strong performance from its stock portfolio, but the earnings report as a whole had mixed news. First, revenue was lower than expected, largely driven by weak performance from Berkshire's insurance segment. In his annual letter to shareholders, CEO Warren Buffett blamed the weak revenue on lowered interest rates. Insurance companies hold a lot of cash in order to cover payouts, which they hold in bonds, and so lower interest rates depress the return from those bonds. Return on equity also came in a bit below what analysts expected. Berkshire shares had fallen about 3% at time of writing.

(Below is Investopedia's original earnings preview, published 2/18/20)

What to Look for

Despite investor concern about Berkshire Hathaway's (BRK.A) lagging stock price, the company has posted positive results in recent quarters, including a major surprise in Q3 2019. The big question now is whether the conglomerate, led by CEO Warren Buffett, can keep up that progress. The company is expected to report Q4 2019 earnings by the end of February. When it does, many investors will focus on whether the company can deliver a robust return on equity (ROE), a key metric for a business with a portfolio as widely varied as Berkshire's.

After a tumultuous first half of 2019, Berkshire shares rebounded, aided by the most recent quarterly earnings release in November. Nonetheless, as of Feb. 15, Berkshire Hathaway stock has still lagged behind the S&P 500 over the past year, posting a total turn of 12.0% as compared with 23.1% for the S&P during that time. A big concern is the uncertain future of the company when longtime CEO Warren Buffett ultimately retires. 

One Year Total Return for S&P 500 and Berkshire Hathaway
Source: TradingView.

For Q4 2019, analysts expect Berkshire Hathaway to report GAAP net earnings per share (EPS) of $14,025.83 on total revenue of $87.7 billion. These figures would constitute year-over-year (YOY) gains of 190.9% for EPS and 217.6% for revenue, both highly impressive. Part of the reason for these estimated gains is Berkshire's particularly weak showing in Q4 2018: for this quarter, the company posted losses of $15,423.78 per share as revenue plunged 53% to $27.6 billion largely due to a major writedown.

Consensus EPS for Q4 2019 is expected to improve but is actually lower than reported EPS of $19,796.52 for Q4 2017, while consensus revenue for Q4 2019 represents a significant upward trend since reports of $59.0 billion in total revenue from Q4 2017.

In the past several quarters, Berkshire has changed how its GAAP earnings are computed, requiring the company to factor in the change in value of stock holdings owned by Berkshire into its earnings regardless of whether they have been sold. For this reason, it's useful to also consider the most recent quarterly earnings figures. In Q3 2019, Berkshire reported EPS of $10,119.00 on total revenue of $65.0 billion. Q4 2019 projections indicate an improvement relative to Q3 2018.

Berkshire Hathaway Key Metrics
  Estimate for Q4 2019 Q4 2018 Q4 2017
Earnings per share $14,025.83 -$15,423.78 $19,796.52
Revenue (in billions) $87.7 $27.6 $59.0
Return on Equity (Annualized) 31.19% -28.49% 40.47%

Source: Visible Alpha

As a massive holding company, Berkshire Hathaway builds up large reserves of cash and is faced with the challenge of finding where to invest it to create earnings growth. Because of this, ROE, a measure of financial performance determined by dividing net income by shareholders' equity, is a particularly useful metric. Because of how varied the Berkshire business portfolio is and because of how much of that is in investments, it may help investors to think of the company itself as an investment portfolio. In this sense, investors can look toward the return of these investments for a sense of how Berkshire is performing. Berkshire holds a huge amount of stock investments in other companies and must now factor in an unrealized gain or loss, and as a result earnings figures can fluctuate significantly from one quarter to the next. This is the same for ROE.

From Q4 2016 to Q4 2017, annualized ROE rose about four-fold to 40.47%. However, in Q4 2018, ROE tumbled significantly to negative 28.49%. Analysts expect Berkshire to improve in Q4 2019, posting ROE of 31.19%, but that still will be well below the levels of two years ago.