- Berkshire Hathaway Earnings Q3 2015 will be announced on November 6.
- It is expected to earn about 1.3% on capital of $333 billion.
- Earnings matter less here than succession. Warren Buffett is 85.
At 85, Warren Buffett is an American legend, and his annual letters to BRK.A (NYSE:BRK.A) shareholders are as eagerly anticipated as any Presidential State of the Union address.
But all legends pass. Father Time is undefeated. Someday, perhaps soon, Warren Buffett will step down as Berkshire CEO. Someone younger will replace him. Buffett hasn’t given us a name, saying only that it is an insider who will be great at the job.
Speculation centers on two of the executives. Ajit Jain runs the company’s insurance unit, which includes brands like GEICO, as well as less known names like General Re. He would be running a giant conglomerate, and might be expected to break it up, or rationalize it, making Berkshire more like any other company. Someone like investment manager Todd Combs would be more in the Buffett mold, buying and selling pieces of companies, sometimes whole companies, and playing three-dimensional chess against the market.
It won’t be Buffett’s long-time number two, Charles Munger. Munger’s 91.
Meanwhile, there is a company to run, the third quarter numbers being due on November 6. The average estimate is an eye-popping $2,716 per A share, which is why they are priced at $206,700 each. (They have never split. The market cap of the company is $340 billion.) The more investor-accessible BRK.B (NYSE:BRK.B) shares, dubbed “Baby Berkshires,” representing a far tinier portion of the company than the A, are expecting earnings of $1.90/share, and were priced at $137.60 as this was written.
Berkshire is, in a way, two companies. There are its operating units, like GEICO and Berkshire Hathaway Energy, wholly-owned so that their managers can focus on their businesses rather than their markets. Analysts expect the insurance units to do well. It’s enormous, the largest underwriter of medical liability insurance, number eight in workers’ compensation, number two in car insurance, and number four overall in property and casualty with $25.4 billion in premiums earned last year.
The energy units won’t do quite as well, but these are primarily utility companies, buying energy in bulk and selling it to consumers and businesses through company-owned lines. (The largest utility ETF, First Trust Utilities, is down only 2% over the last year.) Berkshire is one of the largest buyers of renewable energy, and continues to buy new projects. Berkshire also owns Burlington Northern, which was a huge profit center during the oil boom but is suffering in the bust.
Then there are what you might call Berkshire’s “side bets,” positions that Buffett or his underlings have taken on behalf of the company. This is what analysts focus in on. It’s a mixed bag. There are big winners here like Wells Fargo (NYSE:WFC), of which it holds 9%, Costco (NASDAQ:COST), of which it owns 1%, and Kraft Heinz (NASDAQ:KHC), of which it owns a whopping 27% stake. But there are also dogs like IBM (NYSE:IBM), of which it owns 8%, and Walmart (NYSE:WMT), where it owns a 2% stake. Despite this, when it becomes known that Berkshire has bought into a company, it gets a pop in the market, and when a position is sold, that stock goes down.
Here is the problem. Berkshire’s performance, taken in total, has been getting worse. Over the last year the stock is actually down 1.34%, and over the last 5 years its gain of 73% is almost precisely matched by the S&P 500. Buying Berkshire today is like buying a giant mutual fund.
Whatever the number reported next week, it will mean a lot less to investors than white smoke rising from the Omaha chimney whenever Buffett’s actual successor is named. And the plans of that person, whoever they might be, for the assets Buffett has left them.