Quality of BRK earnings worries analyst

[shalab]

Interesting - not sure if the analyst gets BRK model.

 

http://blogs.wsj.com/deals/2011/11/07/berkshire-hathaway-earnings-quality-worries-analyst/?mod=yahoo_hs

 

[zarley]

There's really not much there (at the linked article).  But, it's fair to observe that $800 million of after-tax earnings benefit (a direct offset of insurance losses in the quarter) from the loss-reserve release is a noteworthy caveat to the quarter's earnings.  That $800 million is almost a third of the reported earnings and is unlikely to be a reoccurring event -- it's part of the lumpy earnings thing from a great insurance operation.  A cynical observer might think they released those reserves just to reduce the sting of the insurance losses they did incur during the quarter.

 

I still want to know what equities BRK has bought with that $10 billion they put to work this year ($7 billion in Q3).  Blue-chip European industrials would probably be my best guess.

[tombgrt]

So he is worried about the loss-reserve release but has no interest in noting the 2b+ loss in derivates?

 

For me the main take-away from this year is Buffett's (partly) regained focus on stock purchases after mainly focusing on buying operating businesses for almost two decades. That says something about stock market valuations.

[zarley]

Well, the linked story is an abbreviated p.o.s. 

 

I would presume that the SN analyst had more thoughts that just the reserve release.  In any event, that's more thoughtful than the fluffy Tilson cheerleading also included in the piece.

 

The equity purchases really are, for me, the interesting little story in the 10Q.  Spent a few million buying back BRK shares, but $7 billion buying other things.  As I said, I'm dying to know what that other stuff is.

 

 

 

[gfp]

On the new large equity purchases, Buffett has said they are an American company (or companies), but that their business in international.  We know it fits into the category of Commercial, Industrial & Other and that he got permission from the SEC to keep it confidential for the time being.  UPS has been sounding pretty Buffett-like recently... just sayin'

[zarley]

I hadn't heard the characterization of the equities as being US based.  UPS seems a really good candidate though. 

 

 

[Rabbitisrich]

The writer probably played cute with the analyst's meaning. The analyst noted that reserve releases are lower quality earnings than, presumably, recurring earnings, which is true. The writer's headline implies that low quality earnings are possibly endemic to Berkshire as a WHOLE. It's just a hack writer's gimmick of messing about with categorical boundaries.

[mpauls]

Same nonsense as a few years ago.  Wall street experts showing their "expertise" yet again. 

 

I'm copy/pasting from a few years ago:

 

EQUITY PUT CONTRACTS

Equity puts are very similar to selling insurance-the purchaser pays a premium and in return is protected from future loss. The loss in this case is a decline in the general stock market.

 

Berkshire sold puts and collected premiums of $5.9 billion up front, which Buffett invested. “Derivative premiums,” like insurance premiums, are invested until the contracts expire. These are European style contracts, meaning the seller (Berkshire) is liable only for losses that exist on the expiration date of the contract. The amended contracts have an average weighted expiration of ~10 years. In the meantime Buffett gets the benefit of the use of this money.

 

PUT THIS INTO CONTEXT

In December 1929 the Dow Jones Industrial Index was at about 370. In 1944, 15 years later, the index had fallen a total of 60% i.e. a 6% annual loss. In equivalent terms, Berkshire’s Equity puts would require payment of about $22 billion. To break even on this transaction Berkshire Hathaway would need to compound $5.9 billion at about 8%.

 

If markets are at par with the initial and amended strike prices over the next 13 years, Berkshire will not have made and will not be required to make any payment. Meaning, derivative float will explicitly become equity. In this case, the value of “Equity Put Float” will have definitely compounded well above 15% annually.