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What’s behind Berkshire Hathaway’s 1Q18 Losses?

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1Q18 performance

Berkshire Hathaway (BRK.B) announced its 1Q18 results on May 5. Buffett’s investment conglomerate posted a net loss of $1.1 billion, or $692 per share, mainly due to changes in its accounting method to mark investments at current prices. The company saw investment writedowns of $8 billion in 1Q18 as compared to appreciation of $775 million in the prior-year period. Other major asset managers including BlackRock (BLK) and Blackstone (BX) have also seen lower superior returns, or alpha generation, in 1Q18.

Equities declined in 1Q18 mainly due to fears of faster rate hikes, a slowdown in the technology sector, and trade wars. These factors resulted in lower valuations of Berkshire’s portfolio holdings. Excluding investment losses, Berkshire’s revenues stood at $58.5 billion compared to $64.4 billion in 1Q17. The decline was mainly due to lower revenues from Berkshire’s reinsurance group partially offset by an increase in all other subsidiaries and segments including GEICO, BNSF, Energy, Manufacturing, McLane, Services, and Financial Products.

Operating profits

Berkshire Hathway’s divisions saw operating profit growth of 30% in earnings before taxes in 1Q18 mainly due to lower losses in its reinsurance group, lower claims in the insurance business, higher operating efficiency in BNSF, and manufacturing and services growth. Divisions managed EBT of $6.6 billion compared to $5.1 billion in 1Q17.

Berkshire’s investments in manufacturing, BNSF, and energy have yielded results in the form of improved operating margins and higher revenue growth. Among other insurers (XLF), Prudential (PRU) and AIG (AIG) also saw lower claims in 1Q18.

Valuations and repurchases

Berkshire Hathaway (BRK.B) continued to trade at a premium valuation of 1.38x, higher than the 1.2x target set by management for repurchases. The company didn’t engage in dividend or repurchase programs in 1Q18. Overall, the stock has returned 5.8% over the past six months compared to the 3.0% return of broad indexes (SPY).

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