Buffett’s Faith in Berkshire Remains Undimmed

Warren Buffett’s Berkshire Hathaway bought $5 billion of its own stock in Q2 – and yet it was a net seller of equities by $13 billion. What gives?

As you know, legendary investor Warren Buffett shocked the financial world in May when he announced his company Berkshire Hathaway had divested totally of its airlines, Since then investors have turned to the investing titan for inspiration and hope, but the Oracle of Omaha gave neither as he sat on a huge and growing pile of cash that he was unwilling to deploy, he made a small little acquisition of some of Dominion Energy’s assets, he bought some Bank of America, this isn’t the same Warren Buffett who pumped $5 billion into Goldman during 2008 or became acting CEO of Salomon Brothers.

However, Berkshire announced its Q2 earnings on Saturday, and the results may rouse the flagging spirits of fundamentally-driven investors. Warren Buffett scanned the investment landscape and determined that the best thing for Berkshire Hathaway to buy would be… Berkshire Hathaway. That’s right, Berkshire bought back a record $5.1 Billion worth of its shares through June 30th, and analysts estimating Berkshire conducted an additional $2.4 Billion additional worth of buybacks through the rest of July.

Berkshire reported over $26 Billion in earnings for the second quarter, but it really isn’t that rosy.

Real Vision Blog - Chart: Berkshire Hathaway Quarterly Net Income (Bloomberg)
Source: Bloomberg

As Buffett is quick to remind, this GAAP metric includes gains/losses on securities.

Real Vision Blog: Buffet Note - Berkshire Hathaway Q2 Earnings Press Release
Source: Berkshire Hathaway Q2 Earnings Press Release

Seeing as Berkshire owns over $200 billion worth of equities, this metric isn’t that useful.

If you factor out the $31 billion in capital appreciation, Berkshire actually lost money…

Real Vision Blog: Berkshire Hathaway Q2 Earnings Press Release
Source: Berkshire Hathaway Q2 Earnings Press Release

…since, even though operating earnings were in the black at $5.5 billion (down 10% Year over year), the company incurred almost $11 Billion in capital impairment, most of which were incurred on Precision Cast Parts, a manufacturer of airplane parts that Berkshire acquired in 2016 for $37.2 billion.

Real Vision Blog: Berkshire Hathaway Q2 Earnings Press Release
Source: Berkshire Hathaway Q2 Earnings Press Release
Real Vision Blog: Berkshire Hathaway 2020 2nd Quarter Report
Source: Berkshire Hathaway 2020 2nd Quarter Report

Revenues for Precision Cast Parts were down 32.5% compared to Q2 2019…

Real Vision Blog: Berkshire Hathaway 2020 2nd Quarter Report
Source: Berkshire Hathaway 2020 2nd Quarter Report

…and as Berkshire noted in its 10Q that earnings as a percentage of revenues are expected to continue to be negatively impacted through 2020 due to inefficiencies associated with aligning operations to reduced aircraft build rates.

Real Vision Blog: Berkshire Hathaway 2020 2nd Quarter Report
Source: Berkshire Hathaway 2020 2nd Quarter Report

Keep in mind that PCC has already eliminated 10,000 jobs in an solemn restructuring plan.

Real Vision Blog: Berkshire Hathaway 2020 2nd Quarter Report
Source: Berkshire Hathaway 2020 2nd Quarter Report

This is a stark reminder that, Bufett’s exit of the airlines may have been prudent, even if American Airlines is up say 7% today.

Lastly, even though Berkshire bought back at least $5 billion of its own stock, it was a net seller of equities in Q2 by almost $13 billion.

Real Vision Blog: Berkshire Hathaway 2020 2nd Quarter Report
Source: Berkshire Hathaway 2020 2nd Quarter Report

So it seems that while Buffett’s confidence in the stock market has not been restored, the Oracle of Omaha’s faith in Berkshire remains undimmed.