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Investment Gains Offset Operating Results for Berkshire

Greggory Warren, CFA (greggory.warren@morningstar.com)

As wide-moat Berkshire Hathaway BRK.A/BRK.B reported second-quarter results that were in line with our expectations, we are leaving our $380,000 ($253) per Class A (B) share fair value estimate in place. Second-quarter (first-half) revenue, which now includes unrealized and realized gains/losses from Berkshire's investments and derivatives portfolios, increased 7.4% (29.9%) to $73.6 ($154.6) billion. Excluding the impact of investment and derivative gains/losses and other adjustments, second-quarter (first-half) operating revenue increased 2.1% (2.8%) to $63.5 ($124.0) billion.

Operating earnings, excluding the impact of investment and derivative gains/losses, declined 10.9% (4.0%) year over year to $6.1 ($11.7) billion during the second quarter (first half) of 2019. When including the impact of the investment and derivative gains/losses, Berkshire's operating earnings rose 17.2% (228.6%) to $14.1 ($35.7) billion. Aided by share repurchases that the firm has made over the past year, net earnings per Class A equivalent share rose 17.9% (230.1%) to $8,608 ($21,824) during the second quarter (first half) of 2019.

Book value per share, which still serves as a decent proxy for measuring changes in Berkshire's intrinsic value, increased 4.0% sequentially to $233,977 (from $224,950 at the end of the March quarter), slightly better than our forecast of $233,948. The company closed out the June quarter with a record $122.4 billion in cash and cash equivalents, up from $114.2 billion at the end of March (and $103.2 billion at the end of June 2018).

This left Berkshire with around $98 billion in dry powder that could be committed to investments, acquisitions, share repurchases, and dividends. That said, we were surprised by the lack of share repurchase activity (just $442 million) during the second quarter, with the firm sitting on so much cash and its shares priced as attractively as they were during the first quarter (when Berkshire bought $1.7 billion of common stock).

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