At first glance, Berkshire's latest financial report may seem dull, but it is actually full of highlights; excluding exchange rate fluctuations and one-off expenses, the company's core earnings still show strong growth.
Berkshire reported that in the third quarter, post-tax operating profit (excluding investment income and losses) decreased by 6% year-on-year to $10.1 billion, equivalent to $7019 per Class A share, which is 4% lower than FactSet's market expectations. The third-quarter profit was also lower than the record-breaking $11.6 billion in the second quarter.
Adjusted for exchange rate fluctuations, Berkshire's third-quarter profit increased by approximately 8% to $11.2 billion.
Further adjustments are needed to exclude approximately $0.5 billion in one-time pre-tax expenses related to a bankruptcy of a company held by a Berkshire insurance subsidiary. After this adjustment, Berkshire's profit is almost flat compared to the second quarter.
Berkshire calculated total income including one-time investment income and operating profit excluding these incomes separately in its financial report. CEO Warren Buffett told investors to focus on operating profit as it better reflects the company's actual profitability. Similarly, exchange rate fluctuations should also be adjusted.
Due to the depreciation of the US dollar in the third quarter, Berkshire incurred a non-cash after-tax loss of $1.1 billion, resulting in an increase in non-US dollar debt liabilities exceeding $20 billion.
According to accounting standards, the increase in the value of liabilities is a negative factor, thus reducing income. However, in reality, exchange rate fluctuations vary between quarters. Fluctuations in exchange rates brought positive impacts in the first half of the year, adding $1 billion to income. Due to the recent rise in the US dollar against the Japanese yen, this quarter may also bring positive impacts. These fluctuations do not affect Berkshire's actual profitability.
Barron's mentioned the impact of exchange rate fluctuations in its financial report analysis on Saturday and pointed out the possibility of Berkshire suffering a $1 billion exchange rate impact during the period in its performance forecast.
"Just as the short-term fluctuations in stock prices can affect operating profits, currency fluctuations in debt can have a similar impact," said Chris Blumstrand, Chief Investment Officer of investment firm Semper Augustus. He closely monitors Berkshire Hathaway and believes that both should be excluded when analyzing operations and economic profits.
Barron's estimates that Berkshire Hathaway's market capitalization is approximately 1.55 times the book value as of September 30, equivalent to 22 times the adjusted after-tax operating profit on an annualized basis in the first half of 2024. Berkshire Hathaway's Class A stock closed at $678,000 last Friday, up 25% this year, outperforming the S&P 500 index by about three percentage points.
Most of Berkshire Hathaway's yen-denominated debt is used to support its over $20 billion equity investments in five Japanese trading companies. Berkshire Hathaway finances in yen at a rate below 2% to acquire stocks of these higher-yielding trading companies. This is one of Buffett's savvy investment strategies, which reduces Berkshire Hathaway's overall cost by half through these stock investments. Berkshire Hathaway started investing in these companies five years ago.
In the third quarter, Berkshire Hathaway's profits included some highlights, such as the underwriting profit of its Geico auto insurance business doubling to $2 billion before taxes.
The Burlington Northern Santa Fe Railroad segment's after-tax profit grew by 13% to reach $1.4 billion, while Berkshire Hathaway Energy (a large-scale utility division) rebounded from last year's slump, with quarterly after-tax profits tripling to $1.6 billion.
Due to the significant increase in cash and cash equivalents to a record $325 billion, insurance investment income soared by nearly 50% after taxes, reaching $3.7 billion.
However, the total cash amount was overestimated by $15 billion at the end of the third quarter due to Berkshire's purchase of $15 billion worth of government bonds. Berkshire held $288 billion in government bonds as of September 30. Buffett tends to invest most of Berkshire's cash in ultra-safe government bonds.