In November, I wrote on Seeking Alpha that I expected Berkshire (NYSE:BRK.A) and (NYSE:BRK.B) to beat consensus estimates for Q4 "Operating Earnings", mainly because the analysts had misunderstood why Berkshire missed consensus in Q3. See here.
Berkshire did, in fact, beat Q4 consensus and by just about the amount I predicted. I wrote that investors should expect at least a "5% earnings surprise on the current Q4 consensus of $3,485 M." Actual Operating Earnings were $3,776 M, a 8% beat. Since then, BRK.A has begun to reverse its recent 8 months of underperforming the SP500. BRK was at 1.28x BV (Book Value) an hour before the Friday close. Then, buyers began front-running the weekend earnings report and it closed Friday at almost 1.29x BV. On Tuesday afternoon, it is 1.31x BV. Getting all the way back to 1.40x BV probably depends on crude-by-rail regulations, a spring thaw reversing weak Q1 Burlington Northern Sante Fe (BNSF) results, no major catastrophes, a flat to higher overall market, and whether large caps or small caps lead the market from here. However, having underperformed significantly, I expect BRK.A to now outperform.
BNSF beat consensus by an amount and for reasons very similar to my forecast.
Berkshire's Q4 revenues were in-line, as I forecasted. As for profits, I wrote "Analysts expect BNSF's earnings to be flat from Q3 to Q4, but we think they could rise by at least $70M." Well, BNSF's Q4 Operating Earnings rose $130 M Q/Q. Its operating profit margin rebounded nicely from 30.7% in 3q13 to 32.8% (a record) in 4q13 due to lower expenses. Three categories of expenses actually fell Q/Q, including the item I focused on in my previous article, "Materials & Other". Also boosting margins were fuel surcharges. I wrote that Q/Q moves in fuel surcharges (a revenue item) versus fuel expense would raise margin Q/Q. It did. In Q4, surcharges covered 65% of BNSF's fuel costs Q4 versus only 63% in Q3.
I wrote "Analysts expect earnings from Utilities & Energy segment to fall by $165 M from Q3 to Q4, but we think they could fall only $65 M." Well, U&E earnings actually fell by $150M Q/Q, but that was due to $75M (or more) of charges in "Other" from impaired geothermal projects and costs related to the Dec2013 NV Energy acquisition. Without these one-time charges, U&E profit fell only $75M or less. Strong results in Insurance and elsewhere offset the one-time charges in the reported numbers.
Q1 is a tougher Y/Y comp for Berkshire, but analysts may be setting a low bar again.
Two forecasts I have seen seem to expect Q1 Operating Earnings to fall by 5% Q/Q. (Note that "Operating Earnings" is Buffett's calculation, but not all analysts forecast that exact number.) My early read is Operating Earnings may fall Q/Q by 3%, so the bar is not nearly as low as it was in Q4. It was the unusually low bar in Q4 that prompted me to write that article in the first place. Items I would warn about in Q1 are related to the severe winter in the US. Geico will probably pay more claims than in a usual Q1. BNSF's Q1 is looking weak due to the impact of weather on both its customers and its own operations. Conversely, the acquisitions of NV Energy and "PSPI", a division of Phillips 66, combined will raise Q1 profits by about $35M (1%).
Regardless of how Berkshire's Q1 earnings turn out, they will matter to how BRK.A performs over the ensuing months, along with crude-by-rail regulations, a spring thaw reversing weak Q1 BNSF results, no major catastrophes, a flat to higher overall market, whether large caps or small caps lead the market from here, and other factors.