Berkshire Q2 Preview: Claims, BNSF, Manufacturing to Drive Growth

Insurance and manufacturing are key

Berkshire Hathaway’s (BRK.B) diversified earnings are considered to be a reflection of the performance of the entire US economy. The company has holdings across the financial, manufacturing, services, energy, and railroad industries. It’s expected to post operating EPS of $3,386 in the second quarter, rises of 35.2% YoY (year-over-year) and 5.3% sequentially.

Lower taxes and growth across sectors have helped Berkshire command better net margins in 2018. On a sequential basis, Berkshire’s growth is expected to come largely from a lower number of claims, manufacturing growth, BNSF’s expansion, and marginal growth in its services.

Berkshire Q2 Preview: Claims, BNSF, Manufacturing to Drive Growth

Oil prices

Berkshire’s top line is expected to rise 7% to $61.6 billion, reflecting a rise in pricing as well as volumes for insurance offerings and manufacturing growth. BNSF has seen a strong rebound in recent quarters on investments in the improvement of operating efficiency, a rise in demand for coal shipments, and manufacturing pickup. Higher oil prices and natural gas prices (USO) have also led to rising demand for coal through thermal power stations.

$100 billion and counting

Berkshire is sitting on huge liquidity, with cash and liquid investments of over $100 billion. CEO Warren Buffett talked about a big-ticket acquisition in his annual letter to shareholders. However, there hasn’t been any announcement so far related to Berkshire’s addition of new companies. Buffett highlighted that valuations across industries were stretched beyond his valuation principles for considering acquisitions.

Insurance companies (XLF) are expecting relatively low claims in the second quarter compared to the fourth quarter of 2017 and the first quarter of 2018, as no major calamity was reported in the second quarter. As rates rise, insurers who deploy funds in debt offerings, including AIG (AIG), MetLife (MET), and Chubb (CB), could see rises in their investment incomes partially offset by weaker returns from equity investments.

In this series, we’ll study Berkshire’s expected growth across its segments, its buyout options, its liquidity deployment, and its valuations.