Berkshire Hathaway Q2 Report

It is almost certain that Berkshire Hathaway will sustain heavy insurance losses from hurricanes Harvey and Irma. Although Warren avoided selling catastrophe insurance in recent years, Geico insures thousands of cars in the affected areas.

In anticipation of a severe decline in Berkshire’s share price, I reviewed its most recent quarterly statement to calculate how much it increased in value since I first valued it on this post, based on the most recently published financial statements.

Q2 Report

Cash on hand increased from $86 billion at yearend 2016 to $99.75 billion at June 30, 2017, an increase of about 16% in six months. Book value increased from $286,359 million at yearend 2016 to $304,093 million, an increase of 6.2%. With 1,644,580 A shares outstanding, book value per share is now $184,906 ($123.27 per B share), up 7.44% since yearend 2016. As per Berkshire’s stock repurchase program, the new floor for the A share is $184,906 x 120% = $221,887.2 and for the B share it’s $123.27 x 120% = $147.92.

Revenue increased from $54,254 million to $57,518 million quarter on quarter, a 6% increase. Net earnings decreased from $5,001 million to $4,262 million quarter on quarter, a 14.78% decline, mainly due to higher insurance losses and loss adjustment expenses. However, comprehensive income increased from $4,324 million to $7,844 million, mainly due to unrealised appreciation of investments. Float increased from $96 billion to $107 billion, a 11.46% increase.

Value of Investments

On June 30, Berkshire held cash, cash equivalents and US Treasury Bills worth $99,749 million; investments (stocks, preferred stocks, bonds and warrants) worth $179,378 million; plus an investment in Kraft Heinz of $28,418 million. Therefore, the total value of this first pillar is $307,545 million, up 2.13% from the first quarter.

Operating earnings

Net earningsOn my previous post I determined that Berkshire’s net operating earnings grew at a CAGR of 12% in the past 5 years. Operating earnings for 2016 totalled $12,571 million. To estimate the operating earnings for the trailing twelve months, we can make a simple extrapolation and increase this figure by 6% (half the annual growth rate), obtaining $13,325.26 million. Using a multiple of 12 (matching the 5 year growth rate), I calculate that the value of this second pillar is $13,325.26 x 12 = $159,903.12 million.

Fair value

Adding the value of these two pillars, I find that Berkshire’s current fair value is $467,448.12 million. This is equivalent to a value of $284,236 per A share, or $189.50 per B share, which gives me a price to book value ratio of about 1.54.

On Friday, September 8, BRK.A closed at $263,600 and BRK.B closed at $175.50, for a discount of about 7.4% on my fair value estimate. As I stated before, I would like to buy B shares with a margin of safety of at least 20%, which gives me a price of $189.5 x 80% = $151.60.

Price

Since it is almost certain that Berkshire will have decreased earnings due to hurricane losses, I’m going to increase my margin of safety just a bit more, at least until the third quarter report comes out, and update my purchase price from $146.50 (read my previous post) to $150.

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