Berkshire CEO Warren Buffett.
Photograph by Christopher Goodney/BloombergBerkshire Hathaway reported a huge first-quarter loss of $49.7 billion, or $30,653 per class A share, reflecting the sharp drop in the stock market that hammered its equity portfolio that stood at around $250 billion at year-end 2019.
Investors are more focused on Berkshire’s operating profits excluding the swings in the equity portfolio, which have been reflected in earnings since an accounting change last year. Berkshire’s first-quarter operating earnings were $5.9 billion or about $3,619 per class A share (ticker: BRK.A), below the Bloomberg consensus of $3,867 per share. Operating profits were up about 6% from the $5.6 billion in the year-ago quarter.
Investment losses were $54.5 billion in the first quarter, reflecting the declines in Berkshire’s equity portfolio, which is heavy in hard-hit financial stocks.
Berkshire Hathaway CEO Warren Buffett has told investors to focus on the operating earnings because the swings in unrealized equity gains and losses aren’t indicative of the company’s earnings power, now running at about $24 billion annually after taxes.
Berkshire disclosed in its 10-Q filing with the Securities and Exchange Commission that it repurchased $1.7 billion of its own stock in the first quarter, compared with $2.1 billion in the fourth quarter of 2019 and $4.9 billion for all of last year. The company also disclosed that it was a net buyer of $1.8 billion of equities in the first quarter, compared with the light net purchases of $4.3 billion for all of last year.
Investors may be disappointed in the buyback activity and the stock purchases. Many were hoping that Berkshire had taken advantage of the March market plunge to be an aggressive buyer of both Berkshire shares and equities generally. Morgan Stanley analyst Michael Phillips was anticipating about $2.5 billion in stock buybacks.
But a cautious Buffett let cash build on Berkshire’s balance sheet rather than aggressively scoop up stocks. Total cash and equivalents rose to a record $137.2 billion at the end of the first quarter, up from about $128 billion at year end.
Expectations about buyback and equity purchases were modest coming into the earnings report.
Buffett has been quiet publicly about investments in recent weeks, but Berkshire Vice Chairman Charlie Munger, in a recent interview with The Wall Street Journal, suggested that Berkshire has been cautious amid the financial storm.
“We’re always going to be on the safe side,” Munger told the Journal. “That doesn’t mean we couldn’t do something pretty aggressive or seize some opportunity. But basically we will be fairly conservative.”
Buffett likely will have more to say about stock buybacks, the equity market, and the acquisition environment when he takes questions from investors later Saturday at 4:45 p.m. Eastern time as part of Berkshire’s virtual annual meeting. Buffett and Berkshire Vice Chairman Greg Abel will be fielding investor queries.
Berkshire’s book value declined 12% in the first quarter to about $229,000 per class A share from $261,417 a share at the end of 2019.
With Berkshire’s class A shares finishing Friday at $273,975, the stock trades at 1.2 times the March 31 book value. Barron’s is estimating the book value per share based on $371.6 billion of shareholder equity and 1.62 million shares outstanding, with Berkshire’s Class B stock (BRK.B) converted into an equivalent amount of class A shares. The class B shares ended Friday at $182.67.
Berkshire’s book value likely has risen since March 31 due to the rally in the stock market. Barron’s estimates that book value as of Friday was around $238,000 per class A share, meaning that Berkshire now trades for a little more than 1.1 times estimated book value.
That’s low relative to where the stock has traded in recent years at an average of 1.3 to 1.4 times book.
Berkshire class A shares are down 19% this year, trailing the 11.8% negative total return on the S&P 500. That’s a disappointment to Berkshire fans who had anticipated that the company’s cash-rich balance sheet and diversified earnings power would give it defensive qualities and outperform in a falling market.
Berkshire’s cash and equivalents—mostly Treasury bills—now account for about 30% of its market value of $443 billion. Berkshire does have debt, with its insurance and other key businesses showing about $37 billion of notes and other borrowings at the end of the first quarter.
Geico, Berkshire’s big auto insurance business, was a bright spot in the quarter as underwriting profits rose to 28% to $984 million, helped by a sharp decline in driving in March as state governments issued stay-at-home orders to combat the spread of Covid-19.
Geico and other auto insurers are offering credits and rebates to drivers thanks to higher profitability caused by the drop in driving—and accidents—in the current quarter due to the Covid-19 restrictions.
Geico had $2.4 billion of earned premiums in the first quarter, up about 10% from a year earlier, as the No. 2 U.S. auto insurer continues to take market share. State Farm is the nation’s largest auto insurer.
Burlington Northern Santa Fe, the big railroad that is Berkshire’s largest single operating unit, experienced a 6% drop in revenue in the first quarter to $5.4 billion and a 5% decline in operating profits to $1.6 billion.
Precision Castparts, a Berkshire unit that makes aircraft parts, was hurt by the downturn in the aerospace industry and Boeing’s (BA) woes as revenue fell 6.6% to $2.4 billion in the first quarter and pretax profits fell 7.3%. Berkshire doesn’t disclose Precision Castparts’ profits or those of most of its divisions—a frustration to many Berkshire holders who would like to see greater financial disclosure by the company.
Berkshire bought Precision Castparts for about $35 billion in 2016, its largest acquisition of the past decade, and it appears to have been a disappointment, with its revenue little changed since Berkshire purchased it.
Berkshire’s light stock buybacks of $1.7 billion in the first quarter came before the sharpest drop in the stock market and the company’s own shares in mid-March.
The buybacks ended on March 10, with purchases of Berkshire’s class A stock at about $301,000, above Friday’s closing price of $273,975.
Write to Andrew Bary at andrew.bary@barrons.com
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Warren Buffett’s Berkshire Hathaway Reports Huge First Quarter Loss After a Hit to the Value of Its Investments - Barron's
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