Whitney Tilson: Analysis of Berkshire Hathaway’s Blowout Earnings

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Over the weekend Whitney Tilson tweeted on Berkshire Hathaway’s blowout earnings saying:

Here’s the analysis on Berkshire’s Hathaway’s Q2 2018:

Berkshire reported blowout earnings this morning (see earnings report here: www.berkshirehathaway.com/news/aug0418.pdf and 10Q here: www.berkshirehathaway.com/qtrly/2ndqtr18.pdf).

Here’s Glenn’s take (as always, our slide presentation is posted at: www.tilsonfunds.com/BRK.pdf):

Berkshire Hathaway reported Q2 2018 earnings this morning. The headline numbers for the quarter were startling, with net earnings per share almost tripling from $4.3 billion to $12.0 billion.

These headline numbers were impacted by a number of items, the most important of which was a new accounting rule that requires changes in the value of equity holdings, both realized and unrealized, to be shown in the income statement (previously the income statement only reflected realized gains). In addition, Berkshire is a major beneficiary of the lower corporate tax rate for U.S. corporations.

But even excluding these two items, Berkshire’s pretax operating earnings soared 67% (!) from $4.1 billion to $6.9 billion. The standout was the insurance group, led by GEICO, where pretax income jumped more than 5x from $119 million to $673 million. Overall, insurance underwriting profits were $1.2 billion vs. -$24 million in Q2 ’17.

Investment income was up almost 8%, increasing to a run-rate of over $5 billion annually, and the pretax profit of all other operating businesses, the largest of which are manufacturing and BNSF, grew 9%.

Other items of note:
• Float grew by $2 billion year to date to $116 billion.
• Book value per share grew to $217,677 per share, up 3% year to date.
• With the stock today at $304,671, it’s trading at 1.4x book value.
• No shares were bought back under the repurchase program.
• Cash and investments per share were virtually unchanged from the end of 2017.

In summary, it was an exceptionally strong quarter. However, since the majority of the change in earnings came from insurance underwriting, our estimate of intrinsic value didn’t change as much as one might expect (we only include an estimate of normalized insurance underwriting pretax profit of $1 billion annually in our valuation methodology – an overly conservative assumption in all likelihood, in light of the $1.7 billion underwriting profit in only the first half of this year).

Net net, our estimate of intrinsic value, using cash and investments plus an 11x multiple on normalized pretax earnings, is now $348,000 for the A shares and $232 for the B shares, meaning that Berkshire today is trading at a 12% discount to intrinsic value.

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