Warren Buffett (Trades, Portfolio) hasn’t been having a great month. The rock star investor and head of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) has already lost a billion dollars over the third-quarter earnings season thanks to a huge revenue miss from IBM (IBM) and a frightening plunge from retail giant Wal-Mart (WMT). As a man worth some $64.2 billion, you can bet Mr. Buffett isn’t going to be crying over spilt milk; however, such a weak start to this most recent earnings season from two of his biggest investments has certainly been a blow.
Fortunately, last week was slightly kinder to Berkshire Hathaway – though not half as dramatic. Here’s a brief rundown of how Buffett’s picks are faring and what it means for the portfolio of the world’s third-richest man:
Bank of New York Mellon (BK, Financial)
Tuesday’s results from The Bank of New York were definitely better than expected, with third quarter EPS slightly beating most forecasts 74 cents per share. Earnings per common share rose by 16% on an adjusted basis, whereas total revenue increased by one percentage point. The bank’s impressive results were largely driven by a dip in operating costs and noticeable top-line improvements. That being said, the firm did see a decrease in non-interest income due to the absence of a few major one-time gains that took place this time last year.
Although Berkshire Hathaway always appears keen to bet on big banks, it’s worth pointing out that the firm did reduce its stake in The Bank of New York earlier this year by selling off some 1.3 million shares. The motive for that sale will likely have been associated with investor accusations of reactionary management. That said, CEO Gerald Hassell has made improving the bank from within a top priority, and things do appear to be on the up. As of June, Berkshire Hathaway still owned some 20 million shares in the Bank of New York.
Telecommunications giant Verizon reported its Q3 results on Tuesday, with revenues of $33.2 billion and EPS up 10% year-on-year to 99 cents ($1.04 on an adjusted basis). Verizon’s Q3 earnings also included a 5 cents per share non-cash charge. Although service revenues were down 4.1% year-on-year, Verizon beat Wall Street expectations fairly easily, and shares are performing well amid plans for future revenue growth from mobile video, digital advertising and capitalization on the Internet of Things. Much of that growth strategy will center on AOL Inc., which Verizon bought for $4.4 billion back in June.
Shares in Verizon have been on a steady decline since that game-changing acquisition earlier this year but began to bounce back in anticipation of the company’s third quarter results. Berkshire Hathaway owns a relatively small stake in the company, with 15 million shares.
On Wednesday we heard from iconic beverage giant Coca-Cola, where net revenue declined by 5% in quarter three. Frankly, the company’s unimpressive quarter largely came down to an overly stellar – if unsustainable – first-half performance in 2015. The company’s earnings declined 4% year-on-year, which analysts have attributed largely to a strong dollar and lackluster overseas sales. CocaCola’s third quarter EPS came in at 51 cents per share, beating most estimates by a couple of cents per share. That said, last week’s results warned of a higher negative currency impact on full-year sales, which will inevitably impact profit. Shares consequently declined by about 1.5% in pre-market trading, but are definitely holding steady.
Buffett (Trades, Portfolio) has been a long-standing believer in Coca-Cola, and the company has made him a whole lot of money since he began investing in 1988. Berkshire Hathaway owns a 9.15% stake in the firm, with over 400 million shares. As of February, the market value of those holdings stood at around $16.9 billion – and throughout the first two quarters of 2015, that value has continued to flirt with the $17 billion line. Wednesday’s relatively dull earnings will probably push the value of Buffett’s stake in Coca-Cola back below that line, to where it roughly was this time last year.
General Motors (GM, Financial)
Wednesday also brought a fairly strong report from scandal-ridden carmaker General Motors, where huge demand for trucks and SUVs helped pave the way for a surprisingly strong operational result. Despite having to fork over $900 million to the U.S. government for crimes related to delayed recalls in 2014 (and a further $575 million to settle victim lawsuits), General Motors earned a record-breaking $3.3 billion before taxes in North America. Consequently, the company was able to announce a third quarter net income to stockholders of $1.4 billion, or 84 cents per share. EPS adjusted for special items shot up 55% year-on-year to $1.50. Meanwhile, adjusted earnings per share came in at $3.63, up 96% from 2014.
Since third quarter 2014, shares in General Motors have gradually increased by 18.74%, to a close of $35.67 on Monday. Buffett has ridden that success all the way and even added to his stake in the company earlier this year. If General Motors can continue to outperform the rest of the market for quarter four, that investment should pay off big time.
On Thursday drywall manufacturer USG unveiled a set of so-so results that will ultimately prove one of many more chapters in an epic turnaround. USG reported net income increases from a loss of $12 million to income of $76 million, with adjusted net income increases of 23%. Yet the firm’s profit margin did suffer a contraction of 370 basis points, to 17.1%. Revenue for the quarter came in at $972 million versus the consensus estimate of $1.02 billion. In the end, USG finished the quarter with an EPS of 52 cents – which is 4 cents worse than the analyst estimate of 56 cents. The lackluster news sent shares sliding down just under 3%, but they’ve since stabilized.
Berkshire Hathaway owns a 27% stake in USG, or around 39 million shares.
VeriSign, a global provider of domain name registry services, was sitting pretty on Thursday after reporting a rise in non-GAAP earnings from 70 cents per share in 2014 to 78 cents this year. In quarter three, revenues increased by 4.2% to $265.8 million. Registrations have shot up by 3.4% year-on-year, while renewal rates have skyrocketed by 72.7%. With rapid expansion anticipated across Asian markets in quarter four, shares jumped by 6.33% on Friday following the report.
After upping its stake in 2014, Berkshire Hathaway maintains a stake of 11.69% in VeriSign as of June, at just under 13 million shares.
Brakes manufacturer WABCO delivered an okay earnings report on Thursday, with third quarter sales of $643.6 million representing a 6% rise in local currencies – but a 9% drop in USD from this time last year. On a performance basis, this quarter’s operating margin hit 12.7% versus 13.4% in third quarter 2014, with WABCO’s diluted EPS dropping from $1.44 a year ago to $1.39 on Thursday.
To be fair, things are going relatively well at WABCO, with third quarter operating activities generating some $113.3 million in net cash and $98.3 million of performance-free cash flow. As with Coca-Cola, WABCO’s so-so earnings are being largely blamed on the newfound strength of American currency overseas.
Earlier this year, Buffett did reduce his involvement in WABCO by 5%; however, he’s still got a $425 million stake in the company. The value of those shares hasn’t changed dramatically following WABCO’s third quarter report.
Chicago Bridge & Iron (CBI, Financial)
Buffett finished a relatively average week with good news from Chicago Bridge, where adjusted earnings of $1.51 per share coolly surpassed Wall Street expectations and blew past last year’s third quarter EPS by 34.8%. On a GAAP-basis, earnings per share shot up by 37% year-on-year. The company cited a spike in demand for energy in various global markets and a strong performance in construction as the primary reasons for its 13% growth in revenues, which hit $3.38 billion. Gross profit improved by 24.2% to $393.2 million, while operating income shot up by 41.5% year-on-year to $286.1 million.
After taking a nosedive in second quarter 2014, Buffett took advantage of the company’s low share prices and increased his stake in the company to 8.53%, with 9.3 million shares. As things continue to look up at Chicago Bridge, that investment is now looking smarter by the minute.
Where does that leave Berkshire Hathaway?
All in all, last week wasn’t spectacular for Warren Buffett (Trades, Portfolio). Some of his picks are undeniably underperforming, or have got some kinks that need worked out by the end of quarter four. But fortunately, there haven’t been any more IBM incidents for Buffett thus far. In fact, following the end of last week’s results, shares in Berkshire Hathaway actually went up to $137.78 – a rise of nearly 3% across the week. So instead of musing on the tiny rises and falls of last week, Buffett will no doubt be paying sharp attention to a whole new set of results this week - which will include UPS (UPS), Charter Communications (CHTR) and MasterCard (MA).
