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Macroeconomics, Insurance to Dictate Berkshire Hathaway's 2H17

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Macroeconomics, Insurance to Dictate Berkshire Hathaway's 2H17 PART 1 OF 11

Berkshire Hathaway’s 2H17 Earnings: Impact of Calamities

What’s impacting performance?

Berkshire Hathaway (BRK.B) has seen a strong operating performance in recent quarters on the rebound of BNSF Railway and manufacturing revenues, backed by the policies of the Trump administration. The company is also seeing marginal growth due to weak underwriting profits in the insurance sector. Wall Street analysts have revised their estimates downward to $3,147 per share in 3Q17 and $2,727 in 4Q17. Berkshire is expected to see a marginal topline growth of 1.0% in 3Q17 on a year-over-year basis to $59.7 billion.

Berkshire Hathaway&#8217;s 2H17 Earnings: Impact of Calamities

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Berkshire and other major reinsurers are expected to see the fallout of Hurricanes Harvey and Irma and other recent storms. The company continues to outperform the S&P 500 (SPX-INDEX) (SPY) in 2017 backed by manufacturing, BNSF Railway, services, and energy revenues. It operates as a conglomerate and an active asset manager, resulting in diversified earnings with a markup over the broad index. With a market capitalization of ~$449.0 billion, Berkshire is one of the biggest holding companies in the world.

Increasing reserves and undeployed capital

Berkshire is also dealing with a huge cash pile of ~$100.0 billion. With the company finding it difficult to get good investment opportunities, that number could rise more in the second half of 2017, resulting in lower return generation. In 2Q17, Berkshire missed estimates of $2,800 and posted EPS (earnings per share) of $2,592, which was lower than $3,042 in the previous year. The net fell mainly due to subdued investment gains and lower underwriting gains, partially offset by higher BNSF and manufacturing performances. Its operating profit fell 11.0% to $4.1 billion.

Berkshire’s investment gains could rise in the second half of 2017 as equities continue to rise on prospects of higher interest rates and redeployment of capital in the United States due to continued strength in its broad economy. As of June 30, 2017, Berkshire had $99.7 billion in liquidity. It also had a book profit of ~$12.5 billion from holdings of Bank of America (BAC), which is expected to be converted to equity. Berkshire competes with asset managers and insurers such as BlackRock (BLK), Blackstone Group (BX), American International Group (AIG), and MetLife (MET).

In this series, we’ll be looking at Berkshire Hathaway’s performance so far in the second half of 2017 as well as the impact of recent events on its performance. We’ll also look at repurchases, outlook, acquisitions, and valuations.

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