Berkshire 'in Line With Expectations': Morningstar Analyst

Warren Buffett's company posted its annual letter over the weekend.
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Berkshire Hathaway's  (BRK.A) - Get Report  (BKR.B)  fourth-quarter and full-year earnings came in "more or less" in line with expectations, said Morningstar analyst Greggory Warren in a note issued over the weekend.

The conglomerate -- led by investing icon Warren Buffett -- released its annual shareholder's letter on Saturday and most recent earnings.

Berkshire earned $81.4 billion in 2019 according to generally accepted accounting principles, according to the Berkshire letter, and came in with a whopping $128  billion in cash.

That earnings figure includes $24 billion in operating earnings, $3.7 billion in realized capital gains and a $53.7 billion gain "from an increase in the amount of net unrealized capital gains that exist in the stocks" Berkshire holds, according to the letter, which tallies all the figures on an after-tax basis. 

But, take those figures with a grain of salt, warns Buffett.

"That $53.7 billion gain requires comment," said Buffett in his letter, cautioning that it resulted from the same accounting rule imposed in 2018 that he's been griping about the past two years, because it requires companies that are holding equity securities to "include in earnings the net change in the unrealized gains and losses of those securities," sometimes skewing results.

The current results satisfied Morningstar, however, which is leaving its share value estimates in place, said Warren, at $380,000 per class A share and $253 per Class B share.

By comparison, Class A shares came in at $343,449.00 on Friday's close and Class B clocked in at $229.33.

Net income in the quarter came in at just over $29 billion, or $17,909 per Class A share equivalent, up from a loss of nearly $25.4 billion, or $15,467 a share, the year before. 

Warren's analysis shows that when excluding the impact of investment and derivative gains and losses and other adjustments, fourth-quarter operating revenue increased 3.0% to $65.6 billion and for the full-year it rose 2.7% to $254.6 billion.

Net operating earnings, excluding the impact of investment and derivative gains and losses, fell for the quarter 22.7% year over year to $4.4 billion; for the year they were down 3.3% to $24 billion, Warren wrote. That's because expenses rose faster than revenue. 

Warren says, however, that when the accounting rules that Buffett complains about are included, "Berkshire's net earnings increased dramatically."

But looking at book value per share "still serves as a decent proxy for measuring changes in Berkshire's intrinsic value," he notes, showing that that figure bumped up 7.2% "sequentially" to $260,906 from $243,483 at the end of the September. That beat Morningstar's forecast of $252,614.

As for cash, Warren estimates Berkshire has about $104 billion in "dry powder" to take into this year. That money, slightly down from the last time Berkshire reported, could be used for investments, snapping up other companies, buying back shares or for dividends, he said.

Some businesses did not quite live up to Morningstar's expectations, however, including earned premium growth from insurance businesses Geico and BHPG.