Berkshire's second-quarter results are likely to exceed expectations

According to market sources, Berkshire Hathaway will release its financial report on August 4. Prior to this, the U.S. stock market ushered in a strong bull market. Shares of Berkshire's heavyweight Apple have continued to rise sharply. So what about financial statements? Can it exceed market expectations?

In short, through this kind of diversified business activities and low-cost financing to obtain income and earn cash flow, thereby earning income through investment activities, and borrowing the powerful power of compound interest to make the wealth snowball bigger and bigger.

From the perspective of business nature and operating income, the company's business can be divided into two parts, operating activities and investment activities. The fluctuations in stock prices of operating-related listed companies are not included in the current income statement, while investment-related listed companies are included in the fair value Variable profit and loss

Therefore, the analysis of Berkshire needs to be considered from two dimensions, namely "the operating conditions of the main holding companies" and "the overall performance of the US stock market". Let's analyze them one by one.

In terms of operating activities, Berkshire Hathaway's business model is very diversified. They operate by holding subsidiaries in many different industries.

These subsidiaries cover various fields such as insurance, freight rail, public utilities, energy generation, etc., and are closely related to the overall situation of the US economy. So what will happen to the Q2 performance? Overall, since 2015, the overall revenue has entered a period of steady growth, with an increase of about 3%. For leading companies in a stable competitive industry, the growth of revenue is basically consistent with the growth of the industry, and the revenue is in line with that of the US macro market. The economy is highly linked.

In terms of business, the sector that contributes the most to Berkshire's operating income is the sales and service business, which covers and reflects Berkshire's most diversified business areas, such as industrial product manufacturing, franchise services, and media. The revenue of this sector accounts for about 55%. The other two major revenue businesses are the insurance sector (25% in 2022) and the railway, public facilities and energy sector (18% in 2022). The revenue ratio is also very stable.

The latest data shows that U.S. gross domestic product (GDP) grew at a solid annual rate of 2% in the first quarter, and the economy appears to be still expanding in the second quarter. Therefore, for Q2 profits, Berkshire's operating Performance continues to grow.

For investment activities, the essence is to borrow funds at low cost and invest to obtain high returns, earn the difference in intermediate returns, and use the powerful power of compound interest to make the wealth snowball bigger and bigger.

So, how does Berkshire Hathaway raise money?

The predecessor of Berkshire Hathaway was a textile factory, which later acquired the blue chip printing company. The business model of Blue Chip Stamping Company is similar to the prepaid card business. It collects money first and then provides services, which means that there will be a lot of idle funds in the company's account. Buffett used the idle money to buy several companies such as See's Candy, and then Gradually formed a holding company.

After this model was proven successful, the blue-chip stamping business gradually declined. Buffett and Munger turned their attention to insurance companies, and successively acquired National Insurance Company, American Government Employees Insurance Company, and General Reinsurance Company, forming Berkshire Hathaway. Savoy's huge source of insurance float. In addition to contributing profits to these companies, Buffett can also use the float to invest in business, improve the efficiency of capital utilization and make a lot of profits.

Today, Berkshire Hathaway has three relatively cheap capital leverages: AAA debt ratings, insurance float, and derivatives. Enter the derivatives market by selling long-term put options, and the option fee obtained is essentially equal to a long-term loan, which reduces financing costs to a certain extent.

How does Berkshire Hathaway invest?

Berkshire pays great attention to the quality and ability of the management of the invested company when investing. Berkshire adopts a very decentralized management approach. There are only a dozen people in the headquarters and more than 380,000 employees in the entire company. The company's senior management team only participates in and is ultimately responsible for major capital allocation decisions, investment activities, and the selection of the chief executive of each operating business. The executive officer and the subsidiary's business are all ignored. The person in charge of the subsidiary has a high degree of freedom of decision-making power and is responsible for the results, so only managers who meet the standards are selected.

From the perspective of the balance sheet, in the short term, it will vigorously purchase short-term maturing treasury bonds to seek more certain returns, while stock investment is still Berkshire's top priority.

So, what will happen to the performance of Q2?

The concentration of holdings has gradually increased. According to the latest 13F data disclosed on June 29, Apple, which is regarded as the third treasure by Buffett, has reached 44%. Bank of America, American Express, Coca-Cola, Chevron, Occidental Petroleum Ranked 2~5, accounting for 4%-8% of the position. Therefore, the profit impact of fluctuations in Apple's stock price is crucial.

In the second quarter, Apple’s stock price performed very strongly, and even climbed to a record high, within easy reach of the $3 trillion mark. Based on a 5.8% shareholding ratio, Apple can probably contribute $31.87 billion in profits to Berkshire.

What are the market expectations?

For stocks with high attention, the difference between market expectations and actual performance expectations will directly affect stock price performance. However, for targets like Berkshire, which have become market beliefs and have a solid shareholder base (and basically hold stocks with a long-term investment mentality), short-term performance also reflects market confidence to a certain extent. Currently, the market believes that 2023Q2 Berkshire’s U.S. stock earnings were $5,652 per share. In fact, the earnings per share in the first quarter were $24,400. The secondary market U.S. stock market, especially Buffett’s heavy holdings, remains strong. It is expected that the U.S. economy will continue to be strong in the second quarter. In the background, Berkshire's profitability is likely to exceed market expectations.