Key Takeaways

  • Earnings fell enormously due to investment losses form the COVID-19 bear market.
  • Revenue was slightly below expectations
  • Return on investment fell as earnings were dragged down by stock losses.

What Happened

Berkshire Hathaway reported earnings on May 2, and the COVID-19 stock crash weighed heavily on them. Net earnings were a record -$49.8 billion, reflecting the $55 billion loss from Berkshire's massive stock portfolio in the first quarter. This is due to a change in accounting rules introduced in 2018 that means unrealized capital gains and losses need to be counted as earnings. This means if your portfolio of stocks loses value, you still have to count that as a loss, even if you don't sell them at that price. Because of Berkshire's huge stock holdings, this means Berkshire's earnings will fluctuate significantly based off of large, but temporary, stock swings. Berkshire CEO Warren Buffett says this distorts the true value of the business. Stocks have rebounded a decent amount so far in Q2, so many of these losses may be temporary. As its net income collapsed, so too did it's ROE, however, this may also be temporary if the stock market holds its gains through this quarter. Revenue slightly missed expectations, but nothing like the swing in earnings, indicating that Berkshire's non-investment businesses aren't declining like its stock holdings did.

Berkshire also accumulated a record reserve of cash. Buffett said regarding acquisitions, "We have not done anything because we haven’t seen anything that attractive." While his top equity holdings, Apple, Bank of America, Coca-Cola, American Express, and Wells Fargo, were the same as last quarter, Buffett notably completely divested his company of airline stocks.

(Below is Investopedia's original earnings preview, published 4/23/20)

What to Look for

Berkshire Hathaway Inc. (BRK.A), one of the world's largest companies by market value, has consistently lagged the market in recent years despite a portfolio of star businesses, including insurance giant GEICO and railway Burlington Northern Santa Fe. Now, Berkshire's far-flung conglomerate may face its biggest test as the COVID-19 pandemic shrinks many of its subsidiaries' major markets. Investors will focus on CEO Warren Buffett's strategy for navigating Berkshire through this crisis when the company reports results for Q1 FY 2020, which will be reported on May 2. The company also holds its annual meeting on May 2, which will be presented via remote because of the pandemic. Analysts predict a mixed quarter for Q1, with revenue plunging as adjusted earnings per share post solid gains.

Investors also will be focusing on key metric at Berkshire: return on equity (ROE), which helps measure how effectively Berkshire's broad investments are paying off over time.

During the past 12 months, Berkshire's stock has lagged behind the market with a total return of -11.0% compared with -3.7% for the S&P 500. Berkshire also is lagging year to date in 2020.

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

Berkshire Hathaway has a tumultuous history when it comes to revenue and adjusted earnings per share (EPS). Q1 FY 2019 brought year-over-year (YOY) gains in revenue of 60.5% after Q1 FY 2018 saw a YOY decline in quarterly revenue of 22.6%. Analysts predict weakness in Q1 of this year, estimating a 21.2% decline to $63.8 billion. In the most recent reported quarter, Q4 FY 2019, revenue more than doubled YOY, climbing by 138.8%.

Adjusted EPS has fared similarly in recent Q1 periods. A major bump of 48.1% YOY in Q1 FY 2018 offset a YOY decline of 4.9% in the same period a year earlier. That was followed by a more modest increase of 5.8% in Q1 FY 2019. Analysts expect an 11.8% increase in adjusted EPS in Q1 FY 2020 to $3,787.60, following a YOY decline in adjusted EPS in Q4 FY 2019.

It is worth noting that in the past several quarters, Berkshire Hathaway has changed how its GAAP earnings are computed. The company is now required to factor in the change in value of the portfolio of stocks it owns, regardless of whether they have been sold. This has made GAAP earnings much more volatile because Berkshire owns big equity stakes in a large number of major companies.

Berkshire Hathaway Key Metrics
  Estimate for Q1 2020 Q1 2019 Q1 2018
Adjusted Earnings per Share $3,787.60 $3,387.56 $3,202.03
Revenue (in billions) $63.8 $81.0 $50.5
Return on Equity (trailing 12 months from quarter) N/A 7.5% 12.4%

Source: Visible Alpha and YCharts

Berkshire Hathaway is a massive holding company with huge reserves of cash. As such, it must determine where to invest its assets to create earnings growth. ROE, a measure of financial performance determined by dividing net income by shareholders' equity, is a useful metric for Berkshire's performance. Because of the wide variety of companies in Berkshire's business portfolio, investors sometimes prefer to think of Berkshire itself as an investment portfolio. By looking at ROE, investors can see how successful Berkshire has been at providing returns for each dollar of shareholder equity.

While there is no consensus estimate for Berkshire ROE for Q1, the company posted an impressive 21.2% 12-month trailing return (TTM) from its latest reported quarter, Q4 2019. That was its highest 12-month trailing return on equity in more than a decade. But in the previous three quarters, Berkshire posted less impressive TTM returns, ranging from of 7.2% to 7.9%.

Berkshire also has posted widely varying results in Q1 periods. For example, in the trailing 12 months from Q1 FY 2019, Berkshire's 7.5% ROE was down sharply from 12.4% for the same period a year earlier. The massive contraction of global economies may make it even harder for Berkshire to consistently boost both its ROE and earnings to turn around its stock price.

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