BRK.A released the FY23 Q2 earnings report after market hours on August 5, 2023, with revenue of $92.03 billion in the second quarter, an increase of 21.43%, net profit of $35,912 million, an increase of 182.08% year-on-year, the results exceeded expectations.

Core Viewpoint

Continued recovery in the US economy leads to improved operating performance, strong US stock growth drives overall net profit to the upside

The company's business can be divided into two parts, namely operating activities and investment activities. In terms of business activities, Berkshire covers insurance, freight rail, utilities, energy power generation and other fields, closely linked to the overall state of the US economy, the US GDP growth accelerated to 2.4% in the second quarter. The post-pandemic economic expansion continues, which will lead to improved performance of major holding companies. In terms of investment activities, Berkshire's position cycle is long and concentrated, mainly investing in the US stock market, about 78% of the value concentrated in five companies, so the US stocks rebounded strongly in the second quarter against the positive pull of Berkshire net profit.

Insurance business warms up with PILOT to offset the negative utility growth impact, and overall operating profit growth

The pre-tax profit for the quarter was $11.4 billion, up 9% year-on-year, mainly by the insurance business's operating results and later pulled the profit after taking control of Pilot. Pilot side, January 31, 2023 to $8.2 billion in 41.4% of Pilot's interest, prior to this, Berkshire has held 38.6% interest in Pilot, accounted to equity method, earnings contribution for the quarter was 186 million yuan. For public utilities, revenue from BNSF fell 24.0% yoy to $1.615 billion. The decline in profitability was mainly due to a decrease in overall cargo volume and increased non-fuel operating costs, while some of the losses were offset by the reduction in fuel costs. Increased employees in non-fuel operating costs and rising wages leading to higher pay and benefits costs are direct incentives of overall costs.

Investment returns out-expected growth due to rising US stock markets and the high interest rate environment in the US

Berkshire's fixed income mainly invests in national bonds, mainly in the form of US short-term treasury bonds, and the current high US interest rate environment has benefited from US short-term treasury yields. As of June 30, 2023, U.S. Treasury debt investments due 2023 and 2024 have a fair value of about $8.3 billion, accounting for 90%.

In terms of stock investment, the price of open shares in the second quarter directly pulled the growth of investment income. The current investment income on securities held for the second quarter was $330.46 billion, representing a year-on-year change of 149.4%. There is no change in heavy positions. Apple remains Berkshire's largest position, with a market capitalization of $177.6 billion.

Investment advice

For Berkshire, share price growth is more derived from earnings growth to get an intrinsic value boost with a valuation premium brought by investor trust in Berkshire. In terms of earnings growth, the US macroeconomic trend and US stock market performance directly determine the company's performance, net profit forecast needs to closely track the performance of heavy stock prices; in terms of valuation, investors are relatively stable and optimistic about the company's future growth and profitability, but does not exclude future management changes or economic environment Changes bring down the valuation level

Risk Alert

Key employee departure or misemployment; impact of stock market volatility; macroeconomic environmental fluctuations.