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Berkshire (BRK.B) Pre-Q2 Earnings Analysis: To Buy or Hold?
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Berkshire Hathaway Inc. (BRK.B - Free Report) is expected to register an improvement in its top and bottom lines when it reports second-quarter 2024 results.
The Zacks Consensus Estimate for BRK.B’s second-quarter revenues is pegged at $97.3 billion, indicating 5.2% growth from the year-ago reported figure.
The consensus estimate for earnings is pegged at $4.83 per share. The Zacks Consensus Estimate for BRK.B’s second-quarter earnings has moved down 5.3% in the past seven days. The estimate suggests year-over-year growth of 4.6%.
Image Source: Zacks Investment Research
Decent Earnings Surprise History
Berkshire’s earnings beat the Zacks Consensus Estimates in three of the trailing four quarters, while missing in one, the average surprise being 37.20%. This is depicted in the following chart.
Image Source: Zacks Investment Research
What the Zacks Model Unveils
Our proven model does not conclusively predict an earnings beat for Berkshire this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. But that is not the case here, as you can see below.
You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
Earnings ESP: Berkshire has an Earnings ESP of -5.70%.
The insurance business is likely to have benefited from improved pricing, solid retention, higher average premiums per auto policy, increased exposure and favorable reserve development. Continued insurance business growth is expected to have increased float.
However, high catastrophe losses are likely to have been a drag on underwriting profitability. There were nine weather events in the second quarter that resulted in at least $1 billion in inflation-adjusted economic losses, according to NOAA's National Centers for Environmental Information, per a report published in S&P Global. Thus, the combined ratio is likely to have deteriorated.
GEICO, the private passenger automobile insurance business, is expected to have delivered an improved performance, banking on higher average premiums per auto policy as well as lower claims frequencies.
Investment results are likely to improve, given a larger investment asset base and a higher reinvestment rate.
Unfavorable changes in business mix and lower fuel surcharge revenues are likely to have weighed on the railroad business. However. lower fuel costs might have limited the downside.
Improved earnings from the U.S. regulated utilities, natural gas pipeline and other energy businesses are likely to have benefited the utilities and energy business. However, lower earnings from the real estate brokerage business are expected to have dampened the upside.
However, higher customer demand for products and services in many businesses is likely to have favored manufacturing, service and retailing businesses.
Share buybacks in the to-be-reported quarter are anticipated to have provided a boost to the bottom line.
Price Performance and Valuation
BRK.B shares have gained 24.4% in the past year compared with the industry’s growth of 21.1%.
Image Source: Zacks Investment Research
Berkshire’s stock is overvalued compared to its industry. It is currently trading at a price-to-book multiple of 1.64, higher than the industry average of 1.58.
Image Source: Zacks Investment Research
However, it is still cheaper than other industry players like The Travelers Companies, Inc. (TRV - Free Report) and The Allstate Corporation (ALL - Free Report) , whose shares are trading at a price-to-book multiple of 1.96 and 2.71, respectively.
Investment Thesis
Among its diverse business activities, the most important is its insurance operations, contributing around one-fourth of Berkshire’s top line. By nature, the insurance business is exposed to the vagaries of mother nature, which induces volatility in its underwriting profitability and weighs on its combined ratio. An extremely active 2024 hurricane season with 25 named storms, including 12 hurricanes and six major hurricanes as predicted by the Colorado State University, will no doubt dilute the bottom line of this insurer.
Nonetheless, its debt level has improved attributable to lowered interest expenses. Its leverage as well as times interest earned compares favorably with the industry average.
Also, given Berkshire Hathaway's dominant market presence, diverse business activities, and, above all, the name Warren Buffet, this company creates tremendous value for shareholders.
Conclusion
Coming back to the to-be-reported quarter, an overactive hurricane season will remain a drag on underwriting profitability, though a better-than-expected private passenger automobile insurance business will limit the downside.
Also, better performance from other businesses should offer respite. Improving return on equity instills confidence.
Investors who already hold Berkshire shares should continue to retain the stock in their portfolio. However, given its premium valuation, new investors can wait for a better entry point.
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Berkshire (BRK.B) Pre-Q2 Earnings Analysis: To Buy or Hold?
Berkshire Hathaway Inc. (BRK.B - Free Report) is expected to register an improvement in its top and bottom lines when it reports second-quarter 2024 results.
The Zacks Consensus Estimate for BRK.B’s second-quarter revenues is pegged at $97.3 billion, indicating 5.2% growth from the year-ago reported figure.
The consensus estimate for earnings is pegged at $4.83 per share. The Zacks Consensus Estimate for BRK.B’s second-quarter earnings has moved down 5.3% in the past seven days. The estimate suggests year-over-year growth of 4.6%.
Image Source: Zacks Investment Research
Decent Earnings Surprise History
Berkshire’s earnings beat the Zacks Consensus Estimates in three of the trailing four quarters, while missing in one, the average surprise being 37.20%. This is depicted in the following chart.
Image Source: Zacks Investment Research
What the Zacks Model Unveils
Our proven model does not conclusively predict an earnings beat for Berkshire this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. But that is not the case here, as you can see below.
You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
Earnings ESP: Berkshire has an Earnings ESP of -5.70%.
Zacks Rank: Berkshire currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Factors Likely to Shape Q2 Results
The insurance business is likely to have benefited from improved pricing, solid retention, higher average premiums per auto policy, increased exposure and favorable reserve development. Continued insurance business growth is expected to have increased float.
However, high catastrophe losses are likely to have been a drag on underwriting profitability. There were nine weather events in the second quarter that resulted in at least $1 billion in inflation-adjusted economic losses, according to NOAA's National Centers for Environmental Information, per a report published in S&P Global. Thus, the combined ratio is likely to have deteriorated.
GEICO, the private passenger automobile insurance business, is expected to have delivered an improved performance, banking on higher average premiums per auto policy as well as lower claims frequencies.
Investment results are likely to improve, given a larger investment asset base and a higher reinvestment rate.
Unfavorable changes in business mix and lower fuel surcharge revenues are likely to have weighed on the railroad business. However. lower fuel costs might have limited the downside.
Improved earnings from the U.S. regulated utilities, natural gas pipeline and other energy businesses are likely to have benefited the utilities and energy business. However, lower earnings from the real estate brokerage business are expected to have dampened the upside.
However, higher customer demand for products and services in many businesses is likely to have favored manufacturing, service and retailing businesses.
Share buybacks in the to-be-reported quarter are anticipated to have provided a boost to the bottom line.
Price Performance and Valuation
BRK.B shares have gained 24.4% in the past year compared with the industry’s growth of 21.1%.
Image Source: Zacks Investment Research
Berkshire’s stock is overvalued compared to its industry. It is currently trading at a price-to-book multiple of 1.64, higher than the industry average of 1.58.
Image Source: Zacks Investment Research
However, it is still cheaper than other industry players like The Travelers Companies, Inc. (TRV - Free Report) and The Allstate Corporation (ALL - Free Report) , whose shares are trading at a price-to-book multiple of 1.96 and 2.71, respectively.
Investment Thesis
Among its diverse business activities, the most important is its insurance operations, contributing around one-fourth of Berkshire’s top line. By nature, the insurance business is exposed to the vagaries of mother nature, which induces volatility in its underwriting profitability and weighs on its combined ratio. An extremely active 2024 hurricane season with 25 named storms, including 12 hurricanes and six major hurricanes as predicted by the Colorado State University, will no doubt dilute the bottom line of this insurer.
Nonetheless, its debt level has improved attributable to lowered interest expenses. Its leverage as well as times interest earned compares favorably with the industry average.
Also, given Berkshire Hathaway's dominant market presence, diverse business activities, and, above all, the name Warren Buffet, this company creates tremendous value for shareholders.
Conclusion
Coming back to the to-be-reported quarter, an overactive hurricane season will remain a drag on underwriting profitability, though a better-than-expected private passenger automobile insurance business will limit the downside.
Also, better performance from other businesses should offer respite. Improving return on equity instills confidence.
Investors who already hold Berkshire shares should continue to retain the stock in their portfolio. However, given its premium valuation, new investors can wait for a better entry point.