The stock market has recovered from a difficult October with big gains during the first days of November. Investors carried some of that enthusiasm into the new week Monday morning, with stock index futures suggesting a modestly higher open when trading begins on Wall Street.
It's rare for companies to release their latest financial results over a weekend, but Berkshire Hathaway (BRK.A -1.86%) (BRK.B -1.89%) has set out to do things a little differently throughout its history. The news of the Warren BuffettGovernment-led Berkshire may not have looked so good at first glance. But looking beneath the surface, you can see many signs of strength that are favorable signs for the broader U.S. economy.
What Berkshire said
The misleading headline you might see in response to Berkshire's third-quarter financial results will point to the company's huge loss during the period. Using generally accepted accounting principles (GAAP), Berkshire lost $12.77 billion during the period, equivalent to $8,824 per Class A share or $5.88 per Class B share.
However, the key to understanding Berkshire's loss lies in those accounting rules. The Buffett-led insurance giant must adjust its investment portfolio to the market each quarter, taking any change in value as a gain or loss for the period. The third quarter was bad for the stock market, so Berkshire had to record losses on investments and derivative contracts of $29.78 billion.
When you look beyond the mark-to-market losses, Berkshire had a solid quarter. Revenue rose 21% year over year to $93.21 billion, led by a tripling of sales from utilities and energy companies. Operating profits, which exclude the impact of required accounting rules, rose more than 40% from year-earlier levels to $10.76 billion. Driving that improvement was a much better loss experience in its insurance underwriting segment, which swung from a loss a year earlier to $2.42 billion in operating profits. Rising interest rates also boosted investment income from the insurance business by more than $1 billion, helping to offset some weakness in the rail segment.
What Berkshire did
Furthermore, Buffett's influence when considering relative valuation was fully evident. Berkshire did not stop buying back its own shares entirely, but buyback activity fell to just $1.09 billion during the quarter as shares remained at elevated levels through much of the three summer months.
Besides, Berkshire continued to increase its cash reserve in the third quarter. At the end of September, Berkshire's holdings of cash, cash equivalents and short-term Treasury bill investments totaled more than $157 billion, up from $129 billion nine months earlier. Add to that fixed-maturity securities, which Buffett says are typically Treasury notes with two years or less to maturity, and Berkshire has nearly $180 billion in easily accessible assets.
On the corporate front, virtually the only major acquisition that occurred during the period came from the Berkshire Hathaway Energy business. In early September, a subsidiary of the energy business invested $3.3 billion to increase its stake in liquefied natural gas specialist Cove Point LNG from 25% to 75%.
Stable progress
Berkshire Hathaway shares didn't move much on the news, but they did rise nearly 1%. That's the kind of muted response investors expect from Berkshire. Given the conglomerate's broad exposure to a wide range of industries across the economy, the latest results from Buffett's company serve as a sign that the U.S. stock market remains healthy despite the macroeconomic pressures facing the nation and the world as a whole.
Daniel Caplinger has positions in Berkshire Hathaway. The Motley Fool has posts on and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
