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Christopher Bloomstran

@ChrisBloomstran

Aug 2

Berkshire Hathaway released its 2nd quarter 10-Q and operating earnings this morning. Despite little activity on the capital allocation front, Berkshire’s key businesses produced generally solid profitability, and FAR BETTER than is being generally reported. A brief summary: 1/5

Most observers reported operating earnings declined by 3.8% from $11.6 billion in 2024’s second quarter to $11.16 billion. When properly assessed, operating earnings in fact increased 7.9% from $11.2 billion to $12.0 billion when excluding a mark-to-market currency translation to U.S. dollars on Berkshire’s $22 billion foreign-denominated borrowings.

Berkshire releases a supplemental non-GAAP presentation of its operating earnings which logically excludes realized and unrealized investment gains and losses. Prior to 2018, unrealized gains and losses were not included in the income statement. The operating earnings presentation does include foreign currency gains and losses in each reporting period relating to translating the face value of debt borrowed in three foreign currencies for the period’s change in the exchange rate. Berkshire includes the loss or gain in operating earnings because as its balance sheet carrying value for the debt liability fluctuates, the unrealized, non-cash gain or loss is also included in SG&A on the income statement.

But think about what investments the internationally-denominated debt finances. In the case of Berkshire’s $14 billion of Japanese yen borrowed (long-term at an average 1.1% interest rate) the proceeds were used to purchase shares in five publicly-traded Japanese trading companies. The five companies had a combined market value of $23.6 billion at March 31. They have gained in price above Berkshire’s evolving cost basis and it has also increased position sizes in each. The dollar declined 4% against the yen during the second quarter. Berkshire includes any market value changes on the stocks trading on Japanese exchanges for each quarterly and yearly reporting period. It also includes any currency change in the translation to U.S. dollars in the market value of each stock position. In a period such at 2025’s second quarter, the declining dollar will add value to reported market value of the stocks, but will create a loss on the carrying value of the debt Berkshire borrowed in yen. Because Berkshire excludes the gains and losses on the stocks in each period (both from price change in yen but also from currency change), the analyst should also exclude the losses and gains on the debt translation. Berkshire’s debt footnote 16 in the 10-Q quantifies the underlying face value of borrowings in euros, British pounds and Japanese yen, the period U.S. translated carrying value, and the pre-tax gain or loss flowing through SG&A. The operating earnings supplement found in each quarter’s press release quantifies the after-tax quarterly gain or loss from currency on the debt in an italicized footnote, making the needed adjustment straightforward.

Long story short, properly excluding currency changes on foreign-denominated debt, operating earnings rose 7.9% in the second quarter and 3.1% for the first half, where most are reporting a 3.8% decline in the quarter and 8.9% decline in the first half.

It’s also being reported that Berkshire’s substantial cash holdings declined $3.6 billion in the quarter, from ~$348 billion to ~$344 billion. NO! Berkshire occasionally purchases a T-bill position on the final trading day of a quarter. When doing so, cash and the T-bill BOTH appear as assets on the first page (asset side) of the balance sheet and an offsetting liability for the purchase amount appears on the second page of liabilities and equity. On the next business day, cash and the liability disappear. Berkshire’s balance sheet had no liability for T-bills purchase at June 30 but did have liabilities of $12.8 billion at year-end 2024 and $14.4 billion at March 31. 2/5

Most observers don’t know to subtract the liability from cash and overstate Berkshire’s cash balance in reporting periods where a liability for T-bill purchase exists. I wrote in the last annual letter that my fantasy is that Berkshire will spend ALL of its cash on a T-bill position on the final trading day of a quarter or year. Heads will explode.

Enough on accounting. The capital allocation front was remarkably quiet during the second quarter. As expected Berkshire repurchased no shares. The stock actually traded above my appraisal of intrinsic value earlier in the quarter for the first time since our owning the stock in February 2000. The shares peaked the Friday before this year’s annual meeting at its highest fundamental valuation since 1998. Ongoing growth in intrinsic value and a ~12% price decline from the peak has the share now at about 85% of my appraisal and back down to valuation levels where Berkshire last bought back shares.

The common stock portfolio (largely held in the insurance operation) again saw net quarterly sales for nearly three years in a row. $6.9 billion of sales were less than offset by $3.9 billion of purchases in the quarter. That’s $3 billion of net sales for the quarter and $4.5 billion for the year.

Berkshire’s operating companies are earning good and progressively improving earnings. BNSF is solidly turning the corner. Cost misalignment and operational issues hampered profitability for several years, as did weak car loadings/volumes. The business is improving on all fronts with second quarter net income up 19.5% over last year and up 13.1% for the first half. Improvement came via overhead improvement, lower fuel costs, and car loadings up nearly 2%, with particular strength in ag and huge growth in coal. Yep. Coal. BNSF was underearning by perhaps $2 billion annually recently and has closed to gap to ~$1 billion. More work to to do but the progress is undeniable. Unmentioned was the recent offer by Union Pacific to buy Norfolk Southern, a transcontinental merger I never would have imagined passing antitrust review, but with the current administration, all bets are off. The combination would impart huge competitive pressure on the remaining Class I North American rails. Expect rail customers, and perhaps the other rails, to lobby hard against the merger.

BHEs earnings were up 7.1% for the quarter and 31.1% in the first half. Margins were modestly better, expenses higher, but most of the improvement was due to no additional reserving at PacifiCorp for 2020s Oregon and Northern California wildfires. Berkshire and BHE did mention the “One Big Beautiful Bill Act” and its potential impact, yet unknowable, on the ability to deploy capex using production tax credits in wind, solar and portions of new grid capacity beginning in 2026. I’ve read the legislation related to energy and my guess is much of what was enacted will be subject to change and reinterpretation. Like the regulatory climate in socialist-leaning states, what happens with tax policy related to renewables will dictate Berkshire’s ability to earn decent returns on capital and to deploy new capital. The value of BHE is in harm’s way for sure. 3/5

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Christopher Bloomstran

@ChrisBloomstran

Dec 11, 2023

A $5.8 billion offer is at hand to take Macy's private at ~$21 a share, a 32% premium over Friday's $17.39 close. Bidders call the stock “undervalued,”down from $74 in 2015. The retail graveyard is full of turnarounds. Good luck. How bad is this one? Some stunning statistics: 1/

At the proposed buyout price the $5.8 billion offer values Macy’s at roughly 7x FY 24 profit. The retailer earns an apparent 20% return on $4.1 billion in equity (much less on capital given $5.8 billion in net debt). But how profitable is M really and where have profits gone? 2/

Over the last 25 years Macy’s reported $21 billion in profits. A quarter of those were distributed as dividends. Fully the remaining 75% of profit was spent repurchasing shares. At the $21 buyout offer the stock is no higher than 25 years ago!That’s $15 billion in bad buys. 3/

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Christopher Bloomstran

@ChrisBloomstran

Aug 5, 2023

Berkshire reported 2Q results this morning. As always, there's more under the hood than the reported results. A few thoughts on what is a very mixed bag. BRK is a good proxy for the US economy. The industrial economy is weak, consistent with what other companies are reporting. 1/

For starters, operating income was $10.0 billion for the quarter, up 6.7% over 2Q 22 and up 9.2% for six months. However, properly excluding forex gains on non-US denominated debt, profit rose from $8.3 billion to $9.6 billion in the quarter, up 15.2% and 17.9% for six months. 2/

However, much of the increase came from income on Allegheny's acquired assets in October and from BRK's now 80% investment in Pilot, up from 38.6% (5 months consolidated and 1 month equity method). Higher interest income on a larger cash balance further drove much of the gain. 3/

Read 23 tweets

Christopher Bloomstran

@ChrisBloomstran

Apr 22, 2023

Ark Invest, the bucket shop EFT promotional “investor,” the one whose founder CEO told a CNBC audience a year ago that ARKK would earn 50% a year (correct if she said minus), is back with its 3rd annual Tesla “research report” with a fresh $2,000 price forecast by 2027. Amen. 1/

That’s a $7 trillion market cap, or a mere 21% of the S&P 500's current cap. MSFT, AAPL, GOOGL, AMZN and META have a combined $7.7 trillion market cap today, up from $6.2 trillion at yearend. From today’s $165 share price, $2,000 in 4.75 years is 69% per year. Makes sense. 2/

@SECEnfDirector

Zero mention of expected hyperinflation in the report. Cue the class action lawyers. Cue @SECEnfDirector. The bull case is $2,500 per share, 25% higher than the base case and a market cap of nearly $9 trillion, or 26% of the current S&P and up from 1.5% of the index now. 3/

Read 25 tweets

Christopher Bloomstran

@ChrisBloomstran

Jan 21, 2023

35 FACTS NOT LIKELY FOUND ON ARKK YET UNRELEASED 12/31/2022 FACTSHEET

1. Loss from 2/12/2021 Peak: -80.1%
2. CNBC Appearances Since 2/12/2021 Peak: 23
3. Cumulative NET Assets Raised Since 10/31/2014 Launch: $17.1 Billion ($14.5B in 2020 and 2021)
4. Assets at 12/31/2022: $6.0B

5. Cumulative Management Fees Earned: $300 Million
6. Market Value at 2/12/2021 Peak: $29 Billion
7. Dollar Loss Since Peak: $23 Billion
8. Annual Return vs S&P 500 Since 10/31/2014 Launch: 5.4% vs 10.3%

9. $ARKK Price 12/31/22: $31.24
10. Date Last $31.24: 08/22/2017
11. AUM at 8/22/17: $450 million ($15m @ 1/1/17)
12. Net Inflows Since 8/22/17: $16.9B (Out of $17.1 Since Inception)
13. Percent of ALL DOLLARS Invested in ARKK Since 10/31/2014 Inception Losing Money: 98%
13a. Yep

Read 8 tweets

Christopher Bloomstran

@ChrisBloomstran

Dec 25, 2022

Who could forget the C-Suite high jinks when Elon and CFO Zach Kirkhorn invested $1.5 billion in Bitcoin and added the titles "Technoking of Tesla" and "Master of Coin?" Since the March 15, 2021 rebranding, Tesla and Bitcoin are down 48% and 70%, respectively. Great fun.🎄 1/

While the Bitcoin position and the Tesla outside shareholders have suffered mightily, how have the INSIDERS fared? If you guessed considerably better you are correct. Collectively the brass at Tesla appear to have unloaded 126 million Tesla shares for more than $41 billion. 2/

While Elon's sales are the preponderance of that, selling at an average share price of $325 is pretty good when measured against the present $123.15 price. That's a current bid 62% below the average sale. Nearly all shares were gifts from the board, not bought out of pocket. 3/

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