Berkshire to show investors if adventurous moves in Q3 lifted profit

New York

WARREN Buffett's Berkshire Hathaway has some new tactics to show off.

The billionaire's conglomerate spent the third quarter ploughing funds into international businesses and an initial public offering (IPO), atypical pursuits for a company that spent the start of the year watching from the sidelines as the Covid-19 pandemic spread.

On Saturday, investors get to see how much of an impact that capital deployment had when Berkshire reports Q3 results.

It already helped propel gains for the stock that were twice as high as the S&P 500's advance during the period.

After sounding a warning in May about fallout from the pandemic, Mr Buffett, 90, has slowly started putting more money to work from the company's US$146.6 billion in cash holdings, and even broke a record for the amount of stock repurchased in the second quarter. Berkshire's recent investments in Japanese trading houses and Snowflake's IPO signalled an appetite for new types of pursuits.

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"I see some kind of interesting one-off opportunities, and I hope that we observe that there has been some incremental buyback activity beyond what was disclosed in late July," Jim Shanahan, an analyst at Edward D Jones & Co, said in an interview. But, he said, "I still see some degree of caution."

Berkshire's Class A shares jumped almost 20 per cent in Q3, compared with an 8.5 per cent gain for the S&P 500. Outperforming the broader market is a welcome shift for Berkshire, which has lagged behind for the past decade, and so far this year, partly because of its size: The conglomerate is so huge that it struggles to find attractively priced deals that can supercharge growth.

Mr Buffett, who had long preferred direct investments over buybacks, already set a record for repurchases this year, at US$6.7 billion, not counting the Q3 total Berkshire will disclose on Saturday. UBS Group predicted that figure will add an additional US$3.2 billion.

The expansion of Berkshire's horizons includes a big push abroad, with an investment of about US$6 billion in five of Japan's trading houses. The Omaha, Nebraska-based company has typically bet on United States businesses, though there have been some exceptions, including a deal for an Israeli manufacturing company that Berkshire first struck in 2006.

"Berkshire is still unlikely to make a large acquisition amid market volatility, in our view, based on Buffett's previous conservative comments. While the company has not been idle, it will require very large deals to move the needle," said Bloomberg Intelligence analysts.

Snowflake's IPO was another departure during Q3, pushing the company into the realm of public offerings. That's a part of the market Mr Buffett has avoided, although the investment appears to be tied to Buffett deputy Todd Combs.

"I'm sure these guys are looking high and low for opportunities," CFRA Research analyst Cathy Seifert said. "And kudos to them, as well they should."

UBS analysts expect operating income for the conglomerate to be about US$3,587 per Berkshire Class A share, down roughly 25 per cent from a year earlier.

Berkshire's net income generally swings based on movements in its stock holdings because of an accounting quirk. Apple, Berkshire's biggest holding, advanced 27 per cent in the quarter while shares of Berkshire's second-largest holding, Bank of America, were up 1.4 per cent. Snowflake, the company that went public during the quarter, more than doubled in the last two weeks of September.

Berkshire's range of businesses, from BNSF Railway to its footwear and apparel companies, have been hurt by the pandemic and its ripple effects. The railroad probably faced pressure in Q3 from slumping volume, but could see an improvement in margins because of a drop in expenses, according to UBS analysts.

Investors will keep an eye on Geico and how trends are playing out for the auto insurer, according to CFRA's Ms Seifert. Auto insurers including Geico and Allstate benefited as people drove less during shutdowns in the US.

Berkshire was hit last quarter by a roughly US$10 billion impairment charge on its Precision Castparts business, which supplies industries including the aerospace sector. The conglomerate warned in its Q2 earnings report that more charges could be coming if the pandemic's effects are worse than expected. BLOOMBERG