Saturday, August 04, 2007

Berkshire Hathaway FY07 2nd quarter results

Berkshire Hathaway, the holding company run by Warren Buffett, reported its 2nd quarter earnings yesterday. In this blog, we will go through the earning report and look at the earnings and the company.

The company had 1,088,878 class A shares and 13,753,590 class B shares for a market cap of approximately 169 billion dollars. Total shareholder equity was 115.27 billion dollars. So the price to equity ratio is less than 1.5. This is a low number for a company that grew the operating earnings and total earnings in the low 20s and 30 percentage respectively showing that the stock is quite undervalued.

There are a few things of note to observe in the consolidated statement of earnings. Let us look each segment and compare it to the perception of analysts and market commentators.

In the insurance and other segment, sales and service revenues increased as well as investment gains. Geico increased its market share managing to increase profits in an environment of falling insurance premiums. General Re and BRK Reinsurance did particularly well. General Re is doing well overall and should continue to do well for the rest of the year. BRK Reinsurance is doing well in the multiline business segment but megacat insurance premiums will decline in the next year. This should be offset to a certain extent by investment gains on the equitas portfolio.

Utility and Energy section saw revenue and earning growth. This section is doing well as expected.

In the finance and financial products section, interest income slightly increased, investment gains declined compared to the year ago period, derivative gains increased and the other section was flat.

The important thing to point out here is that the interest income from treasuries is not significantly higher than last year as many analysts were expecting. In the first six months of the year, 3.3 billion of fixed maturity securities were bought and another 11.5 billion of equity securities were bought. The important thing to note here is that the securities delivered as part of the equitas deal is listed separately in the cash flow statement. The cash and cash equivalents stood around 39.9 billion. This figure is different in the cash flow statement as some of the money is borrowed for mid american subsidiary.

Interestingly enough, the break down of fixed maturity securities showed 3.7 billion of mortgage backed securities. This number should increase in the coming months as the market remains illiquid and the yield spread widens.

As an intelligent investor may recognize, this is Buffett and Munger time. Irrational fear and illiquid markets plays perfectly into the hands of worlds great investors. In addition, many of Berkshires core holdings like P&G, Walmart, HD etc. dont have liquidity problem and are buying back stock. This should help increase the book value and networth of Berkshire in the coming years.

My breakdown of intrinsic value is around 142 - 145 K per A share after Q2. In fact, the stock deserves a premium for the opportunities available at the moment. One should have part of ones portfolio in this stock as it allows for capital preservation and appreciation at the same time.

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