Key Takeaways
- Berkshire Hathaway beat analysts’ expectations on earnings and revenues but missed on operating earnings.
- Gains on its investment portfolio were down YOY, but operating earnings from all segments except insurance were up.
- Insurance posted a larger underwriting loss than in Q3 2020.
- Revenues increased YOY across business segments, reflecting the conglomerate’s broad exposure to the economic recovery.
Source: Predictions based on analysts’ consensus from Visible Alpha
Berkshire Hathaway (BRK.A) Financial Results: Analysis
Berkshire Hathaway, Inc. (BRK.A) reported Q3 FY 2021 earnings that exceeded analysts’ expectations. Earnings per share (EPS), while down by 63.8% year over year (YOY), were 15.7% better than analysts’ forecasts. Revenue for the quarter exceeded analysts’ estimates by 15.2%, despite being down by 0.4% year over year (YOY).
Berkshire Hathaway recorded a pretax net gain of $4.9 billion on investments and derivative contracts that was included in the revenue figure cited in the table above. This was down by 84.5% from the figure of $31.6 billion recorded in the same period of 2020. On an after-tax basis, the gain was $3.9 billion, down by 84.2% from $24.7 billion in Q3 2020.
Operating earnings, which exclude these gains, were $6.5 billion, compared to $5.5 billion in the same quarter of 2020. This was an improvement of 18.2% YOY but 7.1% below the estimates. The operating earnings figures that Berkshire reports in the notes to its SEC Form 10-Q and in its earnings release are calculated after income taxes and exclude earnings attributable to non-controlling interests.
Berkshire has not made a large outside acquisition since its purchase of Precision Castparts in 2016, but it has continued extensive share repurchases (stock buybacks) as a means to distribute its huge cash hoard to shareholders. It bought back approximately $7.6 billion in stock in Q3, bringing the total for the first nine months of 2021 to about $20.2 billion.
Over the past year, through the market close on Nov. 5, 2021, Berkshire Hathaway’s shares have provided a total return of 39.1%, outperforming the S&P 500’s total return of 33.8%.
BRK.A Operating Earnings
For many years, Chairman and CEO Warren Buffett has urged investors to focus on Berkshire’s operating earnings from its diversified lineup of wholly owned operating subsidiaries, which stretch across a broad spectrum of industries—most notably insurance, railroads, utilities, and energy. However, as of result of recent changes to GAAP reporting rules, the quarterly mark-to-market fluctuations in the value of Berkshire’s investment portfolio must be reflected on the company’s income statement, a rule that Buffett has decried as introducing misleading volatility into the company’s reported financial results.
Operating revenues increased from $63.0 billion in Q3 FY 2020 to $70.6 billion in Q2 FY 2021, an improvement of 12.1%. Meanwhile, operating expenses rose by 11.2% YOY, from $57.0 billion to $63.4 billion.
The biggest drivers of the $7.6 billion YOY improvement in operating revenues came from an increase of $2.3 billion from Berkshire’s manufacturing segments, $1.9 billion from insurance, and a $1.4 billion improvement in its service and retailing segments. Its railroad and energy segments also posted YOY revenue gains, reflecting the conglomerate’s widespread participation in the economic expansion.
As noted above, after-tax operating earnings of $6.5 billion represented an improvement of 18.2% from the same period in 2020. However, insurance underwriting was a drag on results, posting a loss of $784 million in Q3 2021, versus a loss of $213 million in Q3 2020. Insurance investment income was up by 14.4% YOY; railroad, utilities, and energy by 10.6%; and “other businesses” (manufacturing, services, and retailing) by 15.3%. “Other” (which includes goodwill and indefinite-lived asset impairment charges) swung from a loss of $412 million in Q3 2020 to a profit of $349 million in Q3 FY 2021.
Berkshire Hathaway’s next earnings report (for Q4 FY 2021 and the annual report for FY 2021) is expected to be released on Feb. 26, 2022. A highlight of each annual report is Warren Buffett’s accompanying annual letter to shareholders, which traditionally is eagerly anticipated by investors in general, not just Berkshire shareholders.