Like most of Corporate America, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) had a rough Q1 with its share price dropping 19% from $226 to the current price of $183. Berkshire's equity book was hit hard, falling 29%, largely from its overexposure to financials like Wells Fargo (WFC), Bank of America (BAC) and American Express (AXP). Airlines and Berkshire's recent investment in Occidental Petroleum (OXY) were also significantly impacted.
Despite all of the negatives, Berkshire's $128 billion in cash at the end of Q4 provides significant opportunity to Buffett and his investment managers to find deals in this environment.
The value of Berkshire's investments in equity securities (excluding Kraft Heinz (KHC)) dropped 29% to $169.3 billion from $237.7 billion last quarter, driven by broad-based weakness, with financials taking a heavy hit.
From the ~$68.4 billion loss, after reducing the liability for future income taxes on the balance sheet as "Income taxes, principally deferred" and adding back 21%, we see a net book value loss of $54 billion for Q1.
I'm subtracting another $5 billion for Berkshire's preferred investment in Occidental Petroleum. I think there is a very real chance this investment gets completely wiped out. Occidental's bonds have been trading around 60 cents on the dollar, and I believe Berkshire should take an impairment on this investment in Q1.
Berkshire's operating businesses were impacted by COVID in March, and I expect larger impacts in Q2.
Insurance-underwriting: I expect this segment to be break-even. I think GEICO is going to do well in Q1 and will have a record-setting Q2 with much of the country not driving. Accidents are way down according to many reports with everyone cutting back driving in March. Berkshire may have some insurance exposure to business interruption, and I will be reading the Q1 report carefully to understand the extent of this.
Insurance-investment income should come in around $1.5 billion, roughly flat with last quarter, as cash balances and investment mix have been steady. This will decline in future quarters as a result of much lower short-term interest rates.
Railroad, utilities and energy should be down compared to last quarter.
Railway volumes estimates show a 20% sequential decline in Q1, which will negatively impact BNSF.
Utilities and energy businesses should be somewhat insulated, though Q1 is one of the weaker seasonal quarters and industrial energy demand will be down.
I estimate we see $1.5 billion in earnings from this group.
Other businesses containing dozens of companies like Precision Castparts, Lubrizol, Marmon, and others, these mostly industrial businesses will see a negative impact from the current crisis. Even past the current crisis, I see Precision Castparts being impacted for a long time and possibly being written down. PCP wasn't cheap when Berkshire bought it, and I believe demand for new aircraft and other expensive industrial equipment that use PCP's parts will remain low for an extended period.
For Q1, I'll estimate $1 billion in earnings from this group. This segment could show a loss in Q2.
"Other" I will estimate as flat for Q1. This could also show a loss in future quarters as it includes equity method earnings from Kraft Heinz, Pilot, Berkadia and Electric Transmission of Texas, among others.
In total, I expect Q1 operating earnings to come in around $4 billion.
As reported in Berkshire's 2019 10-K, book value as of year-end was $428.5 billion.
Subtracting the loss of $59 billion from the change in investment values and adding $4 billion in operating earnings, I project Q1-20 book value at $373.5 billion.
Berkshire's market cap as of March 31st was $444 billion. Dividing this by $373.5 billion yields a Price/Book Value of 1.19x for Q4.
As of 3/31, Berkshire shares have fallen similar to the overall market and the current book value of 1.19x seems compelling by recent historical standards. But I don't believe this signals the shares are cheap right now, because the intrinsic value of Berkshire's businesses have also been impacted, especially if we believe the market is somewhat efficient and we look at proxies to many of these businesses
I liked Berkshire pre-COVID at 1.3x book more than I like Berkshire post-COVID at 1.19x.
On the positive side, the optionality of Berkshire's cash hoard has certainly increased and gives Berkshire tremendous strength to weather a long economic storm. In an age where most companies keep minimal cash reserves on hand, Berkshire stands out as the adult in the room and a model for responsible corporate finance.
I still believe Berkshire is a good investment at these levels, but I'm not increasing my position in the company and believe there could be further downside. At lower prices, I would consider increasing my position. Until then, I am eager to see what moves Buffett and his investment managers are making and to what extent Berkshire is repurchasing shares.
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Disclosure: I am/we are long BRK.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.