It's not every day that a company misses analyst earnings estimates by $296 per share. That is the case, however, for Berkshire Hathaway Inc. (NYSE: BRK.A , NYSE: BRK.B ) second-quarter earnings. Warren Buffett likely isn't too concerned, even though BRK.B shares fell 1.5% in after-hours trading.
While the miss sounds rather large - and was more than 10% of Street estimates - it's worth remembering that shares of Class A Berkshire stock closed Friday at $270,000. A review of Berkshire earnings shows that the "miss" came from a miss in the traditionally lumpy reinsurance operations.
As Charlie Munger and Warren Buffett no doubt would argue, a single quarter shouldn't change the investment case for a conglomerate like Berkshire Hathaway. BRK.B stock still looks reasonably cheap, and no one can argue with the long-term performance of Berkshire stock. I doubt investors will pay much attention to the Q2 numbers, but if they do, Berkshire stock is worth buying on any dips.
Berkshire Hathaway Earnings
To be sure, Berkshire Hathaway earnings don't look all that great. Earnings per share of $2,592, or about $1.73 per BRK.B share, were down almost 15% year over year. Excluding traditionally volatile derivative gains, operating earnings still fell almost 11%.
But, the earnings weakness came almost solely from the insurance business, in particular the reinsurance business. Despite higher investment income from the float created by the insurance holdings, operating income for the insurance group fell 28% year over year. Per the 10-Q, lower discount rates in the UK and higher-than-expected losses from last year turned reinsurance earnings to a loss.
Of course, the nature of the reinsurance business - which takes on huge, rare risks in return for steady premiums - means quarters like this will happen. Elsewhere, the news was actually pretty good. Net profit for the BNSF railroad business increased 24% year over year. Combined, Berkshire Hathaway manufacturing businesses saw operating earnings jump 15%. Even the service and retailing group saw profit jump 21%, in a tough environment.
Meanwhile, Berkshire Hathaway's book value continues to climb. Book value is $182,816 per Class A share, or $121.87 per BRK.B share, up 6.3% just in the last six months. Investment performance helped: Berkshire Hathaway owned $19.4 billion worth of Apple Inc. (NASDAQ: AAPL ) stock at the end of the quarter. Strong gains there and a good quarter from long-time holding The Coca-Cola Co (NYSE: KO ) offset weakness at Wells Fargo & Co (NYSE: WFC ), Berkshire's largest holding. (AAPL is #2, according to the 10-Q.)
With the exception of reinsurance losses, this looks like another solid quarter in the 47-year tenure of Warren Buffett. And, it seems to keep the bull case for BRK.A and BRK.B stock intact.
BRK.B Stock Still Looks Like a Buy
Even if the $270,000 price tag for Class A shares is too high, investors can still get exposure to Berkshire through the Class B stock. Even with BRK.B having doubled in the past five years, it's a strong core holding for any long-term investor. There's an oft-cited disclaimer in the financial markets that "past performance does not guarantee future results," but the history of Berkshire Hathaway strongly suggests it will only continue to create shareholder value.
One quarter couldn't offset that history. And this quarter, despite a headline "miss," was actually another good one for Berkshire stock.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
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