Berkshire Hathaway Q1 FY2022 Earnings Report Preview: What to Look For

Berkshire Hathaway Inc. (BRK.A) sharply boosted its stockpile of cash last year as its businesses rebounded from the worst of the COVID-19 pandemic. At the end of 2021, the stockpile totaled more than $140 billion. Berkshire now is starting to put that cash to use, including a recent agreement to buy insurance firm Alleghany for $11.6 billion. The transaction, which is expected to close by the end of the year, will be Berkshire's biggest deal in years.

Investors will be looking for details on what Berkshire plans to do with the rest of its cash, along with its overall financial performance, when it reports earnings on April 30, 2022 for Q1 FY 2022. The U.S. economy, which shrank in the first quarter, may rein in Berkshire's performance.Analysts expect earnings per share (EPS) to fall sharply on tepid revenue growth.

Berkshire's revenue and EPS figures include the performance of the company's massive investment portfolio of stocks, derivatives, and other securities. Investors examining Berkshire's official filings with the Securities and Exchange Commission (SEC) will see that below the company's line for total revenues there is a line for investment and derivative contracts. The investments are included in the company's overall revenue and EPS figures used in this story. Because of the size of Berkshire's investment portfolio, those top and bottom line figures will be heavily impacted by fluctuations in the stock market.

In order to obtain a clearer picture of the performance of Berkshire's underlying core businesses, investors should also look at the company's operating income, which excludes the gains and losses from its investment portfolio. By excluding the volatile fluctuations of the company's investment portfolio, the metric provides a clearer picture of the income generated solely by the company's operating businesses, which are insurance, railway, energy, retail and other businesses. Analysts expect Berkshire's operating income to fall for the first time in six quarters. However, the decline is expected to be far less than the company's plunge in net earnings.

Shares of Berkshire Hathaway have outperformed the broader market over the past year. The stock outperformed from late April 2021 to around mid-June 2021. It then began to lag the market. Only at the start of 2022 did the stock begin to clearly outperform again. Berkshire's shares have provided a total return of 20.8% over the past year, well above the S&P 500's total return of -0.3%.

Berkshire Hathaway Earnings History

Berkshire reported Q4 FY 2021 earnings results that surpassed analysts' expectations. EPS rose 20.2% compared to the year-ago quarter, a significant turnaround from the sharp decline reported in the previous quarter. Revenue rose 2.8% year over year (YOY), ending a streak of two consecutive quarters of declines. The company said that many of its businesses recovered in FY 2021 from the economic shock triggered by the pandemic in the previous year. However, many of its businesses continue to be adversely impacted by ongoing global supply chain disruptions.

In Q3 FY 2021, Berkshire's earnings and revenue beat consensus estimates. EPS plummeted 63.8% YOY, marking the first decline since the company reported a loss per share in the first quarter of FY 2020. Revenue sank 20.3% compared to the year-ago quarter, marking the second straight quarter of declines. The declines in the company's revenue and EPS were largely driven by significantly smaller gains made from the company's investment portfolio compared to the year-ago quarter.

Analysts expect a significant weakening of Berkshire's earnings as revenue grows at a lackluster pace in Q1 FY 2022. EPS is expected to decline 60.7% YOY, the first drop since the third quarter of FY 2021. Revenue is expected to grow 4.0% YOY, the second straight quarter of revenue growth after two quarters of declines. For full-year FY 2022, analysts expect EPS to sink 63.9%, which would be the fastest decline since FY 2018. Revenue is forecast to fall 13.8%, its worst performance in at least seven years.

Source: Visible Alpha

The Key Metric

As mentioned above, a key measure of the performance of Berkshire's underlying businesses is operating income, which excludes the company's investment income. The company, however, defines operating income in its own particular way: typically, operating income is a before-tax income measure but Berkshire's metric is an after-tax income measure—it's basically net income excluding the gains and losses of the investments that comprise its large equity portfolio. Keeping an eye on Berkshire's operating-income metric is particularly important because the company has significant investment holdings, including sizable stock holdings in major public companies. These investments can cause Berkshire's earnings to change dramatically from quarter to quarter, fueled by swings in the market. Excluding the investment portfolio's income is a helpful way for investors to see how the company's broad range of operating businesses have performed.

In the two years prior to the onset of the pandemic, Berkshire's operating income expanded, albeit just barely in FY 2019. But in FY 2020, the first year impacted by the economic shock from the pandemic, the company's operating income fell 8.6%. It then rebounded 25.2% in FY 2021, rising above levels reached prior to the pandemic. The final quarter of FY 2021 was especially strong, with operating income rising 45.2% YOY. However, analysts expect operating income to fall 8.0% in Q1 FY 2022. It would be the first decline since the third quarter of FY 2020. For full-year FY 2022, analysts forecast that the company's operating income will rise 2.5%, a significant slowdown from the previous year's pace.