Berkshire Q3 Earnings Show Loss on Catastrophe, Unrealized Market Losses
Stock’s fair value estimate unchanged; improvement in company’s income yield expected this year and next.
There was little in wide-moat Berkshire Hathaway’s (BRK.A/BRK.B) third-quarter results that would alter our long-term view of the firm. We are leaving our $535,000 ($357) fair value estimate per Class A (B) share in place despite the equity and credit market selloff this year. We view the unrealized losses the firm has recorded this year as near-term mark-to-market adjustments that will likely reverse themselves over time. Berkshire has historically invested more heavily in equities than its insurance industry peers and tends to be a buy-and-hold equity investor. The firm’s rock-solid balance sheet and ability to deploy capital in the most attractive options it can find at any given time also separate it from its peers. We expect Berkshire to see a meaningful improvement in its income yield this year and next, with the company’s cash balances (which are mainly invested in U.S. Treasuries) yielding more as interest rates have risen, with the benchmark federal-funds rate currently targeted at 3.75%-4.00% (levels not seen since before the 2008-09 financial crisis).
Third-quarter reported revenue, which includes unrealized and realized gains/losses from Berkshire’s investment portfolios, declined 15.9% to $63.5 billion from $75.5 billion in the prior year’s period. Excluding the impact of investment and derivative gains/losses and other adjustments, third-quarter operating revenue increased 9.0% to $76.9 billion. Operating earnings, exclusive of the impact of investment and derivative gains/losses, increased 20.0% year over year to $7.8 billion during the September quarter, with almost all of the company’s segments posting solid operating earnings growth (with catastrophe losses tied to Hurricane Ian’s impact on all three of Berkshire’s insurance units). When including the impact of the investment and derivative gains/losses (which amounted to $10.4 billion during the third quarter), reported operating earnings declined to negative $2.7 billion from positive $10.3 billion in the prior year’s period.
Greggory Warren does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.