Berkshire Hathaway's operating profit in the second quarter exceeded $10 billion, making over $24 billion from "stock speculation".

On Saturday, August 5th, Berkshire Hathaway, the investment conglomerate owned by the "Stock God" Warren Buffett, released its second-quarter earnings report for 2023. As a highly anticipated investment giant, its financial report may have an impact on the market's performance next Monday.

QoQ Operating Profit in Q2 Increased by 6.6% and Surpassed $10 Billion, Thanks to Strong Insurance Performance

The operating profit of Berkshire Hathaway in the second quarter, which is the most important profit indicator for Buffett, reached $10.04 billion, far exceeding the market's expectation of $8.04 billion. It increased by 6.6% compared to the same period last year when it was $9.42 billion, and increased by more than 24% compared to the previous quarter when it was $8.07 billion.

In the first half of this year, the company's operating profit was $18.11 billion, a 9.2% increase compared to the same period last year when it was $16.58 billion.

Some analysts believe that this is mainly due to the strong profitability of Berkshire Hathaway's insurance business. The insurance underwriting profit increased by 74% compared to the same period last year, helping to offset the pressure from high inflation that the large investment conglomerate faced last year.

Different from the Huge Loss of $53 Billion in Stock Investment in Q2 Last Year, Stock Investment Income in Q2 This Year Reached $24.2 Billion

At the same time, the investment income of Berkshire Hathaway's equity securities holdings also surged in the second quarter. The investment income for the quarter was $24.2 billion, and the income for the first half of the year was $47.6 billion.

In contrast, due to the aggressive interest rate hikes by the Federal Reserve, the U.S. stock market plummeted into a bear market in the second quarter of last year, and Berkshire Hathaway suffered a huge loss of $53 billion from stock investment last year, losing $53.8 billion in the first half of last year.

The financial report announcement mentioned that Berkshire Hathaway gained a net after-tax income of $1.6 billion in the second quarter by selling investment portfolio holdings, and the net income of this kind reached $3.3 billion in the first half of the year.

The overall investment income for the first six months of this year also includes a net revaluation income of approximately $2.4 billion related to the additional 41.4% equity stake in the acquisition of Pilot Travel Centers, the largest truck rest stop in the United States.

Net Profit in Q2 was $35.9 Billion, Compared to a Loss of $43.6 Billion in the Same Period Last Year, Net Profit in the First Half of This Year was $71.4 Billion

The net profit attributable to Berkshire Hathaway shareholders, calculated by adding investment and derivative gains and losses to operating profit, reached $35.9 billion in the second quarter and $71.42 billion in the first half of the year. In contrast, it recorded a net loss of $43.6 billion in the second quarter of last year and a net loss of $38.04 billion in the first half of last year.

Berkshire Hathaway reiterated that the amount of investment gains or losses in any given quarter is usually meaningless, and the resulting earnings per share data may mislead investors who have little or no knowledge of accounting rules. Buffett advocates focusing on the operating performance of Berkshire Hathaway's specific controlled businesses, including insurance, railways, utilities, energy, and retail.

In the second quarter, the operating profit from insurance investments was $2.37 billion, the operating profit from energy companies was $1.26 billion, the operating profit from non-controlled businesses was $535 million, and the operating profit from other sources was $340 million. The insurance float at the end of the second quarter (net liabilities assumed under insurance contracts) was $166 billion, an increase of approximately $2 billion from the end of 2022, and $165 billion at the end of the first quarter.

In the second quarter, share repurchases amounted to approximately $1.4 billion, a sharp drop from $4.4 billion in the first quarter, with cash holdings reaching a near-record high of $147.4 billion

Another focus of concern for investors is share repurchases and cash reserves.

In the second quarter, Berkshire Hathaway repurchased approximately $1.4 billion of common stock, a 57% decrease from the first quarter's $4.4 billion, and the highest since the first quarter of 2021. This brings the total amount of share repurchases in the first half of this year to approximately $5.8 billion.

As of June 30, Berkshire Hathaway's total cash, cash equivalents, and short-term U.S. securities amounted to $147.4 billion, approaching a record high, an increase of nearly 13% or $16.8 billion from the end of the first quarter's $130.6 billion.

In its stock holdings, approximately 78% of the fair value at the end of the second quarter was concentrated in five companies: American Express ($26.4 billion), Apple ($177.6 billion), Bank of America ($29.6 billion), Coca-Cola ($24.1 billion), and Chevron ($19.4 billion). In addition, the fair value of its holdings in Phillips 66 was $13.179 billion, compared to $12.242 billion at the end of 2022.

In the second quarter of this year, Apple, which accounts for nearly half of Berkshire Hathaway's stock portfolio, rose by 17.6%, American Express, the credit card company, rose by 5.6%, Bank of America rose by 0.3%, Coca-Cola fell by 2.9%, and Chevron fell by 3.6%. As of the end of June, Berkshire Hathaway reduced its holdings of Chevron stock by $1.4 billion.

Buffett Warned in May that Profits of Its Subsidiaries Would Decline This Year, Wall Street Bullish on Fixed Income Returns from Holding Short-Term US Treasuries

Buffett warned at the Omaha Annual Meeting in May that profits of most of Berkshire Hathaway's subsidiaries may decline this year, citing the "incredible tailwind" of the US economy nearing its end and accompanied by soaring inflation.

CFRA analyst Catherine Seifert agrees with this view, stating that Berkshire's diversified revenue and profit portfolio is beneficial to its stock price, but it also exposes the company to broader macroeconomic pressures, including inflation.

Edward Jones analyst James Shanahan also expects that Berkshire's subsidiaries such as Clayton Homes, Van Tyul Automotive, and Berkshire Hathaway Home Service will underperform due to rising interest rates. Building product divisions sensitive to residential real estate construction, such as Benjamin Moore, Shaw Industries, and Acme Brick, will have mixed results.

However, they are optimistic about the income growth prospects brought by Berkshire's large cash holdings and fixed income investments. In an environment of rising interest rates, Berkshire will store a large amount of cash in the form of short-term US Treasury bonds with a yield of over 5%. Some analysts predict that the company's interest and other cash investment income will reach nearly $5 billion in 2023, far exceeding last year's $1.7 billion.

In fact, after Fitch unexpectedly downgraded the top-tier sovereign credit rating of the United States this week, triggering a global "black swan" panic, Buffett stated that Berkshire's strategy of buying a large amount of US Treasuries remains unchanged. He said, "The only question next Monday is whether to buy $10 billion of 3-month short-term bonds or 6-month short-term bonds," while the yield of ultra-short-term bonds with a duration of less than one year is hovering at the highest level since 2001.

On Thursday, Berkshire Class A Shares Hit a New All-Time High of $540,000, Attention Shifts to the 13F Second Quarter Holdings Report in a Few Weeks

On Thursday, August 3rd, Berkshire Class A shares rose 1.4% to close at a new all-time high of $541,000 per share, surpassing the previous record of $539,180 set on March 22nd last year. On Friday, the shares fell 1.4%, returning to a one-week low since July 28th, with a cumulative increase of nearly 14% this year.

Warren Buffett will celebrate his 93rd birthday on August 30th. During his tenure, Berkshire Hathaway Class A shares have never been split. The stock price has risen over 25,000 times from around $20 when Buffett took control of the company in 1965, and it is expected to be 23 times the earnings in 2023.

According to media reports, Berkshire Hathaway currently has a market capitalization of about $770 billion, ranking eighth in the U.S. stock market, second only to technology giants such as Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta.

Later this month, Berkshire Hathaway and other large hedge funds will disclose their investment positions for the second quarter to regulatory agencies. At that time, investors will obtain detailed information on changes in Berkshire Hathaway's stock portfolio.