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Sunday, November 04, 2007

Berkshire Hathaway (BRKA, BRKB) quick look at Q3

Berkshire filed their Q3 report (I'm also looking at Q2 for comparison). I'm just making a single quick pass through the filing and taking notes. There are probably errors.

ASSETS
Cash is about the same. They have too much cash and need Buffett to find good investments for it.
Fixed maturity securities are up slightly. Not sure if it's a valuation increase or net additional investment.
Stocks and such are up to $77.9 billion from $73.6 billion, no doubt due to both valuation increases and net additional investment.
Goodwill increased slightly. Must have acquired something, I haven't been keeping track.
Some more utilities investments, which is no doubt good. Utilities/energy goodwill increased slightly, so there must have been a small acquisition in this area.

LIABILITIES
Notes payable in the utilities/energy area jumped up by $1 billion, which matches up with the above.
Finance area's derivative contract liabilities jumped up by $1.5 billion. Someone's making a big bet on something?

Book value increased to $119 billion from $115 billion.


INCOME STATEMENT (comparing year over year)
Except for a drop in insurance premiums, revenues are up pretty much across the board.

Net income is $4.55 billion vs $2.77 billion yoy and $3.12 billion qoq. Holy cow!
Net income per share for the quarter was $2,942!!

Take a simple experiment: annualize that amount, multiply it by a P/E of 15 and you get a stock price of $176K and that's not counting the $18K of excess cash in the company. However, that's a bad way to do a valuation, not only because of seasonal issues but because this is a sunny day earnings amount.

Net income for 9 months was $6,644 per share.


CASH FLOWS
Operations generated $11.4 billion in cash vs $10.3 billion in earnings. However, Q3 only generated $3.9 billion in cash vs $4.6 billion in earnings. I wonder why?

There's a big investment in fixed maturity securities this quarter, almost $6 billion. Sub-prime? [nope]
$5 billion in equities investment this quarter. That railroad company is one of them.
$3.7 billion in stocks sold off this q.
$400 million in business acquisitions this q.

I don't worry too much about Berkshire's financing activities.
Stocks currently held increased by about $1 billion in value since the start of the year.
Net $4.6 billion in stock purchases this quarter. But the portfolio only increased by $4.3 billion. I wouldn't worry about it.

MidAmerican borrowed another billion dollars, looks like long term. A subsidiary borrowed some, too.

I'm skipping the litigation stuff.

SEGMENT REVENUES: This is all quarter-over-quarter (except where noted):
GEICO revenues increased again to $3 billion.
General Re was flat.
Other insurance was flat.
Finance was flat.
McLane was up a bit year-over-year, due to manufacturer price increases, passed directly through to customers. Gross margins are now only 5.77%, but Buffett has said that the low margins are fine.
MidAmerican was up 10% year-over-year
Shaw was down (housing)
Other businesses were roughly flat.

Big derivative gain, probably currency.

SEGMENT EARNINGS: this is all quarter over quarter (except where noted):
GEICO flat
Gen Re down
Berkshire Re down significantly, but still positive (this is probably very lumpy, haven't checked)
Finance flat
McLane flat year-over-year
MidAmerican up year-over-year
Shaw down year-over-year (housing, higher commodity prices)
Other businesses down

Investment and derivatives gains were $2 billion in Q3 vs $608 million in Q2.

A big chunk of the earnings is due to investments and derivatives.

GEICO combined ratio of 88.8% (holy cow, that's good!). But they're dropping prices to widen the moat. Looks like the business continues to expand. Policies in force expanded by about 9%.
General Re: Life/health expanded yoy (partly thanks to currency valuation changes) while property/casualty decreased, on purpose.

Mortgage backed securities actually decreased slightly qoq.

The foreign currency contracts had only a $26 million increase this quarter. I'm surprised, given the drop in the dollar during the quarter.

I might stop following Berkshire at this point. I haven't paid attention to things lately and soon enough I'm going to end up not knowing enough to keep up. I figured since it's on the pink sheets, I might as well... wait a minute!!! Berkshire's not on the pink sheeets! D'oh! The six-figure stock price was my first clue.

Hehe.


CONCLUSION

No doubt that it's tempting to rush off and buy the stock after seeing a blowout quarter like this, but like I said, it's a sunny day earnings statement. If you want to hold the stock for 10 years, fine. But Berkshire does have its bad days. You might buy the stock today and see a General Re type of disaster that drove the price down to $45,000 in 2000.

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