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Berkshire Hathaway's 3Q17 Preview: Key Potential Drivers

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Berkshire Hathaway's 3Q17 Preview: Key Potential Drivers PART 1 OF 12

What to Expect of Berkshire’s 3Q17 Performance in the Wake of Hurricanes

3Q17 performance

Berkshire Hathaway (BRK.B) is expected to see a dent in its profitability for 3Q17, largely due to insurance losses caused by Hurricanes Harvey and Irma. The investing giant is expected to post EPS (earnings per share) of $2,402 per share, compared with $2,951 in 3Q16 and $2,505 in 2Q17.

Berkshire is expected to grow its revenue by 1.2% to $59.8 billion on the back of BNSF Railway and its manufacturing sectors. However, claims in the insurance space are expected to drive down profitability, followed by subdued growth in services.

What to Expect of Berkshire&#8217;s 3Q17 Performance in the Wake of Hurricanes

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Berkshire is expected to post EPS of $2,766 per share in 4Q17, reflecting an expectation of a strong rebound subject to lower claims.

Reforms impact

Meanwhile, the Trump administration is pushing for tax rate cuts, financial reforms, and domestic manufacturing. These measures, if implemented, could create substantial value for Berkshire due to its deployment in the manufacturing and financial sectors. The company has generated superior returns over the broad index (SPX-INDEX) (SPY) in recent quarters due to strategic deployments by its asset managers, including Warren Buffett.

Berkshire has converted its warrant holdings in Bank of America (BAC) into stock, which would could again positively impact its overall earnings in 3Q17. With a market capitalization of ~$462 billion, Berkshire is one of the biggest holding companies in the world.

Major highlight: reserves

Berkshire had cash and equivalents of ~$100 billion on June 30, 2017. With no major acquisitions announced in 3Q17, this is set to rise further in 3Q17. The company will have to deploy additional capital at some point as investors could request for higher payouts in the absence of profitable investment opportunities.

In 2Q17, Berkshire missed estimates and posted EPS of $2,592, which was lower than the $3,042 we saw in 2Q16. Profits fell mainly due to lower investment gains and the weaker performance of the Insurance division, partially offset by improved BNSF and manufacturing performances. The company’s operating profit fell 11.0% to $4.1 billion.

Berkshire faces competition in the purchase of profitable companies largely from asset managers including BlackRock (BLK), JPMorgan Chase (JPM), Goldman Sachs (GS), and Blackstone Group (BX).

In this series, we’ll examine the expected earnings of Berkshire, assess its divisions, and analyze its 2017 and 2018 expectations, macros, strategic initiatives, future expected deployments, and valuations.

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