Berkshire Hathaway Q2 Earnings Preview: Here's What To Expect

Berkshire Hathaway BRK.A BRK.B is expected to report its Q2 earnings results before the market opens on Friday, August 2. BRK.B stock is only up 1.8% in 2019, well below the S&P 500’s 19% gain.

Overview

Based in Omaha and owned by one of the most successful investors in the world, Warren Buffett, Berkshire Hathaway is a multinational conglomerate and one of the biggest companies in the world. It’s wholly-owned subsidiaries include GEICO, Duracell, and Helzberg Diamonds just to name a few. Berkshire also has sizeable holdings in Kraft Heinz (NASDAQ:KHC) , Wells Fargo (NYSE:WFC) , Coca-Cola Company (NYSE:KO) , and Apple (NASDAQ:AAPL) , among others.

Berkshire makes money through the companies it owns, but also through the change in stock prices of its investments. With over $200 billion in investments, the change in prices of the companies owned by Berkshire have a major effect on its performance. Although the company does buy stocks at normal market prices, because it has such a large amount of money to invest in companies, it often is offered the option of purchasing preferred stock, which is a more lucrative deal for Berkshire.

Historically, Berkshire has invested in companies it believes to be undervalued. But recently, it has started to stray from this philosophy, expanding its investments to companies with good growth prospects, including a purchase of 483,300 Amazon (NASDAQ:AMZN) shares earlier this year, currently valued at over $900 million.

Warren Buffett is known as one of the great value investors. So it’s worth taking a look at a current value metric. BRK.B currently trades with a P/E of 18.94, slightly above the S&P 500's 17.39. Although companies are usually compared to their industry, Berkshire is so diverse that the S&P may be a more accurate comparison.

In the past few years, Berkshire has traded with a relatively higher P/E than the S&P than it does now, meaning that BRK.B could be relatively undervalued. Although it is important to note that BRK.B stock has underperformed the S&P, which could be a reason the gap between the two P/Es has closed in recent months.

Q2 Outlook & Earnings Trends

Q1 revenue grew by 3.8% year-over-year to reach $60.678 billion. Because of the way the company is organized, there is no current revenue expectation for Q2, but last quarter continued a general trend of increasing revenue since 2009, so there is optimism that Berkshire can continue this positive growth.

Earnings are expected to fall slightly to $2.71, for a 2.87% decline. Last quarter, GAAP EPS was $8.81, compared to a loss of $0.46 in Q1 2018. Although this does appear to be extreme growth, it is just a reflection of a change to how the company had to report its earnings. So, a more accurate number to look at is Berkshire’s operating earnings. Q1 2019 saw operating earnings jump 5% to $5.55 billion. If Berkshire can continue to increase this number year-over-year, it could help boost the stock.

Berkshire has done well in the trailing four quarters, providing a positive surprise in three of them for an average surprise of 8.28% during this stretch.

Bottom Line

Although earnings could have an impact on the company’s stock price, the size and diversity of Berkshire make it unlikely that a bad report would hurt its future potential. The company is currently sitting on a lot of cash and looking to find a good price for its next big investment. Berkshire increased its stake in Bank of America (NYSE:BAC) earlier this year, but still has the capital to add or increase other positions and investors should watch for news on these investments.

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