As bottom line numbers go, it’s hard to beat Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) $12 billion second-quarter profit, announced Aug. 4. Investors have generally liked the results, pushing BRK.B stock higher in the two days of trading since.
There’s a lot to like about the conglomerate’s earnings report. Some are obvious, while others are not.
Here are some of the highlights.
$111 Billion in Cash
Most people view Berkshire Hathaway’s increasing cash hoard — it stood at $111 billion at the end of June, the largest cash balance in its history — like a noose around its neck, threatening the company’s growth and the future appreciation of BRK.B stock.
Unfortunately, despite the Oracle of Omaha (Warren Buffett) loosening the company’s share repurchase requirements in July, it doesn’t look as though he’s got much of an appetite for anything at current valuations including BRK.B stock.
I view the cash situation in a slightly different way.
First, when the market suffers a major correction of 10% or more — it’ll be sooner rather than later given the fact the company’s cash position tends to grow to its highest levels right before a market crash — Berkshire Hathaway will have a boatload of money to buy back its stock at sub-$200 share prices.
Secondly, I believe that Berkshire Hathaway should be broken up into two companies with most of the cash going to a mini-Berkshire Hathaway to fund the purchase of smaller companies that are too tiny for the parent to consider.
The more cash available means more potential purchases for a mini-Berkshire Hathaway.
Cash, especially during a correction, is king. Buffett’s patience will be rewarded one way or another.
All But One Operating Segment Grew
The company’s insurance business accounted for 24.9% of Berkshire Hathaway’s overall revenue in the quarter, growing 13.1% over last year. Only one of seven operating segments had a decline in revenue in the quarter — McLane Company saw a drop of 1.0% year over year — demonstrating the overall strength of the U.S. and global economies.
I’ve long thought that Berkshire Hathaway should dispose of McLane Company because it accounts for almost 20% of revenue but contributes less than 1% of profits.
McLane’s performance in the second quarter did little to change my mind. The rest, especially GEICO, were works of art.
Apple Is a Keeper
Berkshire Hathaway’s investment in Apple (NASDAQ:AAPL) — it owned 246.5 million shares of the iPhone maker at the end of June; its shareholdings are now worth $51 billion — is turning out to be a much better tech investment than IBM (NYSE:IBM).
In fact, Apple could turn out to be the company’s best equity investment in its history.
Consider that Berkshire Hathaway paid $11.8 billion for its Wells Fargo (NYSE:WFC) stake; that stake is now worth about $28.4 billion based on 482.5 million shares. Given that Buffett’s been buying WFC shares since at least 1995, the annualized rate return isn’t nearly as high as you might think.
Meanwhile, Berkshire Hathaway bought its first shares of Apple in May 2016. At the end of December, it owned 166.7 million shares at the cost of $21.0 billion.
At the end of June, the company’s Apple holdings were worth $47.2 billion, which means Buffett picked up 87 million shares of Apple in the first six months of the year [$47.2 billion divided by $185 (share price on June 30) equals 254 million shares less the 166.7 million at the end of December].
Assuming Berkshire Hathaway paid $180 a share for these shares, its overall cost for its 254 million shares would be $36.7 billion or $144.48 per share.
That’s a gain of 43.4% over a little more than two years. With more than $700 million in annual dividends, I doubt Buffett’s too worried about his IBM investment at this point.
The Bottom Line on BRK.B Stock
Forget its poor stock performance in 2018; forget the fact it has too much cash; and forget the fact Buffett is 87 years old.
The most important thing to remember is he continues to generate enormous profits for shareholders — and that’s the only thing that matters in the long run.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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