Warren Buffett’s Berkshire Hathaway Inc. has some new tactics to show off.
The billionaire’sconglomerate spent the third quarter plowing funds into international businesses and an initial public offering, atypical pursuits for a company that spent the start of the year watching from the sidelines as the Covid-19 pandemic spread.
On Saturday, investors get to see how much of an impact that capital deployment had when Berkshirereports third-quarter results. It already helped propel gains for the stock that were twice as high as the S&P 500’s advance during the period.
After sounding a warning in May about fallout from the pandemic, Buffett, 90, has slowly started putting more money to work from the company’s $146.6 billion in cash holdings, and even broke a record for the amount of stock repurchased in the second quarter. Berkshire’s recent investments in Japanese trading houses and Snowflake Inc.’s initial public offering signaled an appetite for new types of pursuits.
“I see some kind of interesting one-off opportunities, and I hope that we observe that there has been some incremental buyback activity beyond what was disclosed in late July,” Jim Shanahan, an analyst at Edward D. Jones & Co., said in a phone interview. But, he said, “I still see some degree of caution.”
Berkshire’s Class A shares jumped almost 20% in the third quarter, compared with an 8.5% gain for the S&P 500. Outperforming the broader market is a welcome shift for Berkshire, which has lagged behind for the past decade, and so far this year, partly because of its size: The conglomerate is so huge that it struggles to find attractively priced deals that can supercharge growth.
Buffett, who had long preferred direct investments over buybacks, already set a record for repurchases this year, at$6.7 billion, not counting the third-quarter total Berkshire will disclose on Saturday. UBS Group AG predicted that figure will add an additional $3.2 billion.
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The expansion of Berkshire’s horizons includes a big push abroad, with an investment of about $6 billion in five of Japan’s trading houses. The Omaha, Nebraska-based company has typically bet on U.S. businesses, though there have been some exceptions, including adeal for an Israeli manufacturing company that Berkshire first struck in 2006.
What Bloomberg Intelligence Says
“Berkshire is still unlikely to make a large acquisition amid market volatility, in our view, based on Buffett’s previous conservative comments. While the company has not been idle, it will require very large deals to move the needle.”
–Matthew Palazola, senior industry analyst, and Derek Han, associate analyst
To read the analysis, clickhere
Snowflake’s IPO was anotherdeparture during the third quarter, pushing the company into the realm of public offerings. That’s a part of the market Buffett has avoided, although the investment appears to be tied to Buffett deputy Todd Combs.
“I’m sure these guys are looking high and low for opportunities,” CFRA Research analyst Cathy Seifert said. “And kudos to them, as well they should.”
UBS analysts expect operating income for the conglomerate to be about $3,587 per Berkshire Class A share, down roughly 25% from a year earlier.
Berkshire’s net income generally swings based on movements in its stock holdings because of an accounting quirk. Apple Inc., Berkshire’s biggest holding, advanced 27% in the quarter while shares of Berkshire’s second-largest holding, Bank of America Corp., were up 1.4%. Snowflake, the company that went public during the quarter,more than doubled in the last two weeks of September.
Other topics that could come up in Saturday’s earnings report:
Berkshire’s range of businesses, from BNSF Railway Co. to its footwear and apparel companies, have been hurt by the pandemic and its ripple effects. The railroad probably faced pressure in the third quarter from slumping volume, but could see an improvement in margins because of a drop in expenses, according to UBS analysts.
Investors will keep an eye on Geico and how trends are playing out for the auto insurer, according to CFRA’s Seifert. Auto insurers including Geico and Allstate Corp. benefited as people drove less during shutdowns in the U.S.
Berkshire washit last quarter by a roughly $10 billion impairment charge on its Precision Castparts business, which supplies industries including the aerospace sector. The conglomeratewarned in its second-quarter earnings report that more charges could be coming if the pandemic’s effects are worse than expected.
Buffett’s investment in Kraft Heinz Co. has been under pressure in recent years. At the end of the second quarter, Berkshire reported a $2.7 billion gap between how the company carries the stake on its books and its market value. Berkshire has avoided an impairment on the bet in recent quarters, but Kraft Heinzshares fell 6.1% in the third quarter.
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