Did Apple Just Save Warren Buffett's Broad Posterior? -- August 4, 2018

Updates

August 6, 2018: more to follow. Apparently Berkshire Hathaway bought an additional 15 million shares of AAPL in 2Q18. We'll learn more later, but if accurate, BRK owns about 240 (previously announced) + 15 million (today's announcement) = 255 million shares. Outstanding AAPL shares, 4.83 billion. 240 million / 4,830 million = just barely 5% of the Apple corporation. At 5% and 10% -- SEC beneficial ownership rules kick in. My calculations suggest BRK is just under the threshold but if Apple continues buybacks -- which it will -- it will push BRK over the 5% threshold.


August 4, 2018: press release from Berkshire Hathaway, 2Q18 earnings, August 4, 2018:

" ... investment gains/losses in 2018 include a gain of approximately $4.5 billion in the second quarter ..."

This would include "paper gains" from equity in shares of publicly traded companies -- which would have both losses and gains -- and would include Berkshire's AAPL shares.

August 4, 2018: from The WSJ -- Berkshire Hathaway profit surges; change in accounting rule and robust insurance underwriting boosts 2Q18 performance.

Wow, this is so incredibly interesting. I don't anything about this; I'm way in front of my headlights but in the original post I discussed the affect the value of Berkshire's AAPL shares affected his revenues and earnings. I had no idea there was a rule change ... from the linked article:

Berkshire’s earnings are especially volatile due to an accounting rule that went into effect this year requiring companies to include unrealized investment gains or losses in their net income. Berkshire holds large stock investments, and their quarterly changes in value can have a big effect on Berkshire’s net income. 

"... unrealized investment gains or losses ... " sounds like "paper profits" -- see original post below -- my thoughts and my calculations.

From the article:

• operating earnings: rose to $6.9 billion from $4.12 billion the year prior
• operating earnings are more reflective of Berkshire's performance, according to Buffett (see the operating earnings in the original post)

But now, the "stuff" in The WSJ that fits my narrative below (wow, this is great):

• Berkshire's largest stock holding: Apple
• this past week Apple became the first US-listed company to surpass $1 trillion in stock-market value
• but then, nothing more about the impact Apple had on Berkshire's profits
• I guess the WSJ writer assumed readers could figure it out; below, my calculations

Original Post  

 

I don't have time to complete this post but I want bragging rights, so I will post this now for the date-time stamp -- and get back to it later. 

From SeekingAlpha:

• Berkshire Hathaway Q2 revenue of $62.2B exceeds consensus by $261M. Q2 revenue rose 8.6% from Q2 2017
• at June 30, 2018, book value per class A equivalent share was $217,677, exceeding consensus of $215,29
• operating earnings jumped 67% to $6.89B from $4.12B Y/Y; by segment:
• insurance-underwriting: $943M vs loss of $22M
• insurance-investment income $1.14B vs $965M.
• railroad, utilities, and energy $1.89B vs. $1.47B
• other businesses: $2.57B vs. $1.99B
• other: $348M vs loss of $276M
• Q2 net earnings of $12.0B, or $4.87 per class B equivalent share, up from $4.26B, or $1.73, a year earlier
• Q2 EPS for class A equivalent shares of $7,301 vs. $2,592 Y/Y
• Q2 2018 includes a gain of about $4.5B for unrealized gains losses of equity security investments in Q2; as of 2018, GAAP requires including changes in unrealized gains/losses of equity security investments
• insurance float (net liabilities assumed under insurance contracts) was about $116B at June 20, 2018, up $2b since year-end 2017

From MarketWatch:

Count Warren Buffett as one of the Apple Inc. investors cheering Wednesday as the tech giant’s shares jumped almost 6% a day after posting a positive earnings report and outlook. 

That’s because the billionaire chairman of Berkshire Hathaway Inc. BRK.B,  likely made more than $2.6 billion in a single day as Apple shares spiked. 

As of the end of March, Berkshire Hathaway held 239.6 million Apple shares AAPL. Assuming it hasn’t sold any — Berkshire has been loading up on Apple, buying 75 million shares in the first quarter alone — that’s a profit of about $8 billion in four months, and a $48 billion overall stake in Apple.

In May, Buffett — who’s worth about $84 billion himself — told CNBC that he’s a big fan of the Cupertino, Calif., tech giant.

Quick: what important data point was missing in the MarketWatch story above?

From CNBC, May 3, 2018:

• Berkshire Hathaway bought 75 million AAPL shares in 1Q18
• already had 165 million shares
• the most he paid for AAPL shares in 1Q18: $166; could have been significantly less
• highest per share value of AAPL in 1Q18: $170
• value of BRK's AAPL share at end of 1Q18: 240 million x $165 = $37 billion
• prior to run-up in AAPL share price this past week, AAPL peaked at around $190, 2Q18
• value of BKR's AAPL before recent run-up, 2Q18: 240 million x $190 = $45.6 billion
• dividends, 2Q18: $0.73 x 240 million shares = $175 million 

Back to earnings:

• Berkshire Hathaway Q2 revenue of $62.2B exceeds consensus by $261M
• $261 million / $62.2 billion = 0.4 percent
• I would say a 0.4% beat is exactly in-line, especially when considering a company of this size and with so much "hidden"
• anything less than revenues of $61.939 billion would have been a miss in revenues forecast
• back to AAPL:
• $62.2 billion - $175 million in AAPL dividends = $62.025 billion
• share price: $190 - $166 = $24; $24 x 240 million shares = a paper gain of $5.760 billion
• $62.025 billion - $5.760 billion = $56.265 billion  -- which is significantly lower $61.939 billion
• bottom line: one can't say what Berkshire might have done with cash / holdings if it didn't have AAPL, but in my mind, clearly, AAPL saved Berkshire's bacon in 2Q18

Answer to above question: 

• what important data point was missing in the MarketWatch story above? Hint: it almost equals what Berkshire pulls in from its insurance-underwriting. Answer: annual AAPL dividends -- about $700 million / year -- compare with operating earnings from quarter insurance underwriting earnings

Comment:

• folks can debate the financial contribution AAPL made to Berkshire Hathaway
• not discussed, is the change in Buffett's thinking about tech investing that AAPL may have generated
• up until now, Buffett like regional newspapers and IBM for his technology and information services