Key Takeaways

  • EPS was $18,994 vs. the $9,738 analysts expected.
  • Operating earnings were lower than the level analysts estimated.
  • EPS grew dramatically while operating earnings plunged YOY.

What Happened

Berkshire Hathaway reported EPS that was nearly double what analysts estimated for Q3 2020. However, operating earnings, which excludes unrealized gains or losses on the company's large equity portfolio, were lower than expected. Berkshire's EPS, boosted by gains in the company's investments, rose dramatically compared to the year-ago quarter. Operating earnings, which provide a more accurate picture of Berkshire's business operations, sank YOY. The divergence in the company's EPS and operating earnings reflects the divergence between the recent performance of the stock market with that of the real economy, which is still experiencing the adverse effects of the COVID-19 pandemic.

(Below is Investopedia's original earnings preview, published November 4, 2020.)

What to Look For

Berkshire Hathaway Inc. (BRK.A) saw its earnings rebound sharply in the second quarter of the year after posting a giant loss in the first quarter amid the COVID-19 pandemic. But the volatility in earnings had less to do with Berkshire's business operations than it did with its large stock portfolio, which was affected by the pandemic-induced market crash early in the year that was followed by a rapid rebound.

Investors will watch to see how the pandemic continues to impact Berkshire's financial results, including its operating businesses and investment portfolio, when it reports earnings for Q3 FY 2020. They are expected to be released on November 7, 2020. Analysts estimate small year-over-year (YOY) declines in revenue and net earnings per share (EPS) for Berkshire's class A shares. Class B shares (BRK.B) are also available, and at a much more reasonable price.

Investors also will focus on Berkshire's operating earnings, a key metric that excludes the company's investment portfolio. Operating earnings provide a more accurate picture of how Berkshire's businesses performed, especially in times of heightened market volatility. Analysts expect operating earnings to decline sharply.

Shares of Berkshire Hathaway were keeping pace with the rest of the market for about the first five months of the past year. But around mid-April, amid the rebound from the pandemic-induced market crash, the stock began to dramatically underperform. The company's shares have provided a total return of -4.9% over the past 12 months, well below the S&P 500's total return of 9.5%.

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

The stock received an initial boost following Berkshire's Q2 FY 2020 earnings report. EPS rose 89.5%, boosted by significantly higher unrealized gains on its investments compared to the year-ago quarter. Total revenue, including gains on investments and derivative contracts, grew 31.6% for the quarter.  The company's shares rose through mid-September but gradually have pulled back since then.

While Q2 earnings received a boost from the market rebound, earnings for Q1 FY 2020 suffered even more from the market crash that began around mid-February and bottomed in March. Earnings plunged, resulting in the company's worst loss per share in at least three years, amounting to a net loss of $30,653 per share. Losses on investments and derivative contracts also led to negative total revenue for the quarter, the first time total revenue has been negative in at least three years. 

Analysts expect EPS to decline 3.8% in Q3 FY 2020 compared to the same three-month period a year ago as revenue declines 1.0%. For full-year 2020, analysts expect annual EPS to plunge 87.1% while annual revenue falls 27.8%. It would mark the worst annual revenue decline in at least five years.

Berkshire Hathaway Key Metrics
  Estimate for Q3 2020 (FY) Q3 2019 (FY) Q3 2018 (FY)
Earnings Per Share ($) (class A shares) 9,737.59 10,119.00 11,280.00
Revenue ($B) (includes gains/losses on investments and derivative contracts) 75.1 75.9 78.2
Operating Earnings ($B) 5.6 7.9 6.9

Source: Visible Alpha

As mentioned, investors also will focus on Berkshire's operating earnings, a key metric of profitability that subtracts from revenue only those costs that are directly associated with a company's business operations. For Berkshire Hathaway, this strips out the effects of stock market volatility on profits. An accounting-rule change that came into effect over two years ago meant the company had to start including unrealized gains and losses on its equity portfolio in net income. Operating earnings exclude those gains and losses, which can be large in periods of increased volatility, such as in the current year. The metric thus provides a more accurate picture of the operations of Berkshire's various subsidiaries, including its energy, railroad, manufacturing, retailing, and insurance businesses.

The company's operating earnings in Q2 FY 2020 fell 10.2% even as EPS soared compared to the year-ago quarter. Earlier in the year, Q1 FY 2020 operating earnings rose 5.7% while the company posted a major net loss per share. The magnitude of the YOY percentage changes in Berkshire's operating earnings generally are less extreme than the changes in its EPS. Analysts are expecting operating earnings in Q3 FY 2020 to fall 28.1% year over year (YOY), marking the largest decline since Q3 2017. That estimated Q3 decline also is nearly triple the YOY decline in Q2 FY 2020, suggesting that Berkshire's business operations have only begun to feel the pandemic's impact.