Saturday, August 09, 2008

BRKA Q2 Analysis

Berkshire Hathaway filed its Q2 earnings on 08/08/08. I was hoping Berkshire to report headline grabbing mark to market losses with derivatives. This would have opened a buying opportunity for me. However, it turns out that Berkshire had less mark to market losses.

Let us look at the balance sheets to see how Berkshire did.

The shareholders equity took a small drop (2.3%) compared to December 31st. Berkshire's stock holdings have taken a mark to market drop of abotu 5.5 billion in the six month period which have since recovered. In the first six months of the year, 26.7 billion of fixed income securities were bought along with 5.5 billion of equity securities. ( 11.9 billion dollar worth of securities were sold as well ) Overall, in the first six months, 19.4 billion dollars were deployed.

Let us look at the cash flow from operations. This declined to 4.99 billion from 7.43 billion from the corresponding period last year. It is a 33% drop, primarily attributable to the reinsurance market slump.

Interestingly, the interest, dividend and other investment income came in at 2.4 billion for the first six months at par with last year. This should increase in the coming years because of the large investment in the fixed income category.

Insurance underwriting gain declined this year compared to last year. The decline was across all insurance sectors with the exception of Berkshire Hathaway Primary Group. BHAC, the monoline insurer is now operational in 49 states. This sector is expected to be lumpy in earnings and very few reinsurance contracts were written in the first six months of the year.

Utilities section continues to do well with earnings fallling slightly for the quarter but up for the first six months.

Manufacturing, service and retailing continues to do wel in a tough environment. The total revenues jumped up to 17.49 billion from 14.98 billion thanks to the Marmon/TTI acquisition. Earnings also increased by 11.5%. The general trend in manufacturing/retail is that revenues are up but income is down. This is a trend across all businesses as we see increased inflation but that can't be passed on to consumers.

Finance and financial products also declined somewhat compared to the prior year. Manufactured housing, furniture/transportation leasing hasnt fallen off a cliff but are down nominally.

In general, going by strict quantitative analysis, the IV is around 142K/A share. However, IV is also the potential cash that can be taken out of the business in its life time. With this calculation, under normal economic conditions, the IV will be closer to 150-160K/share.

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