Friday, May 05, 2006

Berkshire Hathaway (BRK.A/BRK.B) Q1 Report

Berkshire Hathaway, a holding company run by Warren Buffett reported its quarterly earnings today. Berkshire did well, increasing share holder equity by 3845 million dollars to a total of 95.349 billion dollars an increase of 4% in a quarter. This means that the company has approximately 62,000 dollars in book value equalling approximately 70% of the value of the stock. The number of shares outstanding increased by 0.11% a very small amount compared to some of the other large companies such as Google and Yahoo!

Several articles to appear about Berkshire from leading publications are incorrect or use metrics over a selected time frame to make a dramatic story. In this particular case, the WSJ article incorrectly uses the Sharpe ratio to compare Berkshire ( which has an investment portfolio and a bunch of operating businesses ) to other mutual funds. I am thirlled to see that Berkshire equity portfolio has a 50% chance to outdo the market. Many articles have factual errors including this one by Jubak. Some negative commentators like the S&P analyst Siefert have simply vanished from the scene. For a keen investor, these can be opportunities that allow one to exploit the inefficiencies created by forces that influence Mr. Market.

Let us take a quick look at the rest of the 10-Q to see the Berkshire prospects for the rest of the year. The quarter was undoubtedly strong one for Berkshire. Despite the flurry of acquisitions announced, cash and equivalents were at 42 billion dollars at the end of the quarter. This compares to a position of 45 billion dollars at the end of last quarter. Some of the announced deals are going to take a few months to close which should put downward pressure on cash and equivalents. Inspite of the large number of acquisitions, cash and equivalents will continue to be a major presence in Berkshires balance sheet as the operating businesses and security investments will continue to generate cash.

Total revenue including Finance and Financial Products increased by 29% compared to the same quarter last year. Excluding Finance and Financial Products, the revenues increased by 24.5%. Earnings from operating businesses increased 32% year over year. In other words, the operating businesses are growing at a very good clip taking out finance and financial products. Taking a look at the cash flow statements gives a very clear picture. Cash flow from operating activities increased by one billion dollars year over year. 4.4 billion dollars were deployed this quarter for investing activities which is very healthy. The dollar deployed in investing activities today is going to generate income in the coming quarters.

Revenues in the utility business shot up by 19% compared to the same period last year. This quarter included revenues from Pacificorp only for a period of ten days. The remaining quarters should see increased revenues from Pacificorp. Manufacturing, services and retailing section saw revenues grow by 13%. In the finances and financial products section, revenues increased by 20%. In the investment and derivative gains section, this quarter produced 526 million dollar gain this quarter compared to 76 million dollar loss. As Warren noted in his annual letter, he is changing focus from foreign currency contracts to foreign businesses as evidenced by the acquisition of the Israeli metal cutter Iscar.

In the last report we said Berkshire is a strong buy if the price drops below $86,000. In this quarter the Berkshire class A price briefly went below $86,000. After this quarterly report, Berkshire is a very strong buy if the price drops below $89,400. I would be surprised if the stock didn't cross the 90,000 barrier in the coming week.

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