Warren Buffett (Trades, Portfolio)'s conglomerate, Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), is set to report its third-quarter earnings this Saturday.
Berkshire's third-quarter figures will tell us about the business's health, but more importantly, they should give us more insight into Buffett's capital allocation policies for 2020. Here are five things investors should pay attention to in the report.
Share buybacks
It will be very interesting to see if the Oracle of Omaha has been buying back shares in Berkshire in the third quarter. Estimates suggest that Berkshire's book value per B share is currently in the $180 region.
That implies that the stock has been trading around 1.2 times book value for much of the past six months. Buffett had already increased repurchases heading into the third quarter, so it will be interesting to see if he has ramped up activity.
With the group's cash balance expanding and the economic downturn from the pandemic nowhere near as bad as expected for the company, the backdrop is exceptionally favorable for further repurchases. However, personally I'm not expecting a substantial increase in activity.
Still, I think it's not unreasonable to suggest Berkshire could have spent several billion dollars buying back its stock in the third quarter. The activity level will give us insight into Buffett's view of Berkshire's valuation at current prices.
Portfolio activity
We only get a limited view of Berkshire's activity in public equity markets in the group's quarterly reports, but this can provide useful insights. It will be interesting to see if Buffett has made substantial purchases or sales of any securities, as well as the equity portfolio's overall performance during the quarter.
Business activity
Earlier in the year, Berkshire's management implied that some of the conglomerate's businesses might not survive the pandemic. We later found out that the group had written off a substantial portion of the goodwill attached to Precision Castparts, reflecting the business's lower value.
The third-quarter report should provide some more information on how the pandemic has impacted Berkshire's subsidiaries and if there have been any further writedowns.
The report should also detail acquisitions. Buffett hasn't made any elephant gun style acquisitions this year, but that does not mean that Berkshire's subsidiaries have not taken advantage of the current economic climate to snap-up bolt-on acquisitions. Any deals should be revealed in the third-quarter report.
Book value growth
I mentioned above that Berkshire's book value was about $180 per B share based on its second-quarter results. The third-quarter figures should give us some insight into whether or not the business has seen book value expand over the past three months.
A robust performance from the equity market will help the group's common stock portfolio. Cash generation from operations may also help increase shareholder equity. However, further writedowns and operational losses will reduce equity.
Share repurchases will increase value. Put simply, there are lots of moving parts here. We won't know the full underlying picture until the figures are published.
Operational performance
Finally, the company's operational performance should give us some insight into how the conglomerate's various subsidiaries have performed in the pandemic. I think it could be worth paying particular attention to the insurance business, which has been a growth powerhouse for Berkshire over the past few decades.
A combination of large catastrophes and insurance losses linked to the pandemic could cause losses. On the other hand, GEICO may be on track for a record year. In the last recession, the group reported a substantial increase in customers as people shopped around for better deals. GEICO may not only benefit from this trend in 2020 but also from a lower number of miles driven, which has reduced traffic accident frequency.
Disclosure: The author owns shares in Berkshire Hathaway.
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