<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Berkshire Hathaway’s (BRK-A, BRK-B) first-quarter earnings are out and they paint a mixed picture. On one hand, operating earnings actually climbed during the period. But Berkshire’s massive investment portfolio took a massive unrealized loss. The keyword is “unrealized,” and we’ll get to that in just a minute.” data-reactid=”16″>Berkshire Hathaway’s (BRK-A, BRK-B) first-quarter earnings are out and they paint a mixed picture. On one hand, operating earnings actually climbed during the period. But Berkshire’s massive investment portfolio took a massive unrealized loss. The keyword is “unrealized,” and we’ll get to that in just a minute.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The big story here is the impact of the coronavirus pandemic. In fact, Berkshire’s 10-Q filing makes reference to “COVID-19” 31 times.” data-reactid=”17″>The big story here is the impact of the coronavirus pandemic. In fact, Berkshire’s 10-Q filing makes reference to “COVID-19” 31 times.

First, some highlights:

  • Q1 operating earnings: $5.871 billion, up from $5.555 billion last year ($5.56 billion expected by analysts

  • Q1 investment gains: -$54.517 billion, down from $15.498 billion last year

  • Q1 net earnings per A share: -$30,652, down from $13,209 last year

  • Q1 net earnings per B share: -$20.44, down from $8.81 last year

  • Q1 cash and equivalents: $137.263 billion, up from $127.997

<h2 class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="About COVID-19” data-reactid=”25″>About COVID-19

“Prior to the middle of March, many of our operating businesses were experiencing comparative revenue and earnings increases over 2019,” management said in the regulatory filing. “As efforts to contain the spread of the COVID-19 pandemic accelerated in the second half of March and continued through April, most of our businesses were negatively affected, with the effects to date ranging from relatively minor to severe.”

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Berkshire is a conglomerate consisting of companies that touch a broad array of industries, and so it’s arguably a reflection of the U.S. economy. And like the economy, it is getting disrupted by the coronavirus pandemic. In February, Buffett warned that “a very significant percentage of our businesses“ was being affected.” data-reactid=”27″>Berkshire is a conglomerate consisting of companies that touch a broad array of industries, and so it’s arguably a reflection of the U.S. economy. And like the economy, it is getting disrupted by the coronavirus pandemic. In February, Buffett warned that “a very significant percentage of our businesses“ was being affected.

“Several of our businesses deemed essential have continued to operate, including our railroad, utilities and energy, insurance and certain of our manufacturing, distribution and service businesses,” management continued. “However, revenues of these businesses have slowed considerably in April. Other businesses, including several of our retailing businesses and certain manufacturing and service businesses are being severely impacted due to closures of facilities where crowds can gather, such as retail stores, restaurants, and entertainment venues.”

Source: Yahoo Finance/David FosterSource: Yahoo Finance/David Foster
Source: Yahoo Finance/David Foster

<h2 class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Ignore the investment losses” data-reactid=”40″>Ignore the investment losses

Regarding that massive loss in investments, Berkshire’s managers explain it this way: “The amount of investment gains/losses in any given quarter is usually meaningless and delivers figures for net earnings per share that can be extremely misleading to investors who have little or no knowledge of accounting rules.“

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The reported number includes an unrealized loss of $55.5 billion in Berkshire’s stock portfolio. This is the result of the COVID-19 crisis triggering the fastest bear market in history, which continued to crash before bottoming in late March.” data-reactid=”42″>The reported number includes an unrealized loss of $55.5 billion in Berkshire’s stock portfolio. This is the result of the COVID-19 crisis triggering the fastest bear market in history, which continued to crash before bottoming in late March.

Click here for complete coverage of Warren Buffett and Berkshire Hathaway.Click here for complete coverage of Warren Buffett and Berkshire Hathaway.
Click here for complete coverage of Warren Buffett and Berkshire Hathaway.

A recent change to generally accepted accounting principles (GAAP) by the Financial Accounting Standards Board requires companies to account for short-term swings of their equity investments in their quarterly and annual earnings. These are known as unrealized gains and losses — unrealized because these are paper losses, not actual losses (or realized gains and losses) that come from the sales of these securities.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Berkshire chairman and CEO Warren Buffett and vice chair Charlie Munger voice their disdain for the rule with every earnings announcement.” data-reactid=”57″>Berkshire chairman and CEO Warren Buffett and vice chair Charlie Munger voice their disdain for the rule with every earnings announcement.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Q1’s unrealized loss offsets the $53.7 billion unrealized gain in the previous quarter.” data-reactid=”58″>Q1’s unrealized loss offsets the $53.7 billion unrealized gain in the previous quarter.

“Over time, Charlie and I expect our equity holdings — as a group — to deliver major gains, albeit in an unpredictable and highly irregular manner,” Buffett said in February.

Meanwhile, Berkshire’s cash (and equivalents) balance climbed to $137.263 billion as of the end of Q1, up from $127.997 three months ago.

Source: David Foster/Yahoo FinanceSource: David Foster/Yahoo Finance
Source: David Foster/Yahoo Finance

Investors and spectators continue to monitor how Buffett and his team may deploy some of that cash. Perhaps they buyback more shares of Berkshire. Perhaps they increase the positions in the investment portfolio. Perhaps the acquire another massive business.

<h2 class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Berkshire’s businesses take a hit amid COVID-19” data-reactid=”77″>Berkshire’s businesses take a hit amid COVID-19

Insurance underwriting earnings, which includes the GEICO auto insurance business, fell to $363 million in Q1, down from $389 million a year ago.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="During an interview on March 10, Buffett&nbsp;told Yahoo Finance’s editor-in-chief Andy Serwer&nbsp;that the COVID-19 outbreak had caused GEICO to see fewer accidents, which is favorable for the business’s profit margins.” data-reactid=”79″>During an interview on March 10, Buffett told Yahoo Finance’s editor-in-chief Andy Serwer that the COVID-19 outbreak had caused GEICO to see fewer accidents, which is favorable for the business’s profit margins.

“People just haven’t been driving as much,” Buffett said. “People have changed their behavior.”

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="It’s worth noting that GEICO has been offering insurance credit to current and prospective policyholders.” data-reactid=”81″>It’s worth noting that GEICO has been offering insurance credit to current and prospective policyholders.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Berkshire’s railroad, utilities and energy earnings declined to $1.751 billion from $1.858 billion a year ago. Railroad operator Burlington Northern saw business drop off during the end of the quarter. According to the Association of American Railroads, March carloads were down 6% year-over-year.” data-reactid=”82″>Berkshire’s railroad, utilities and energy earnings declined to $1.751 billion from $1.858 billion a year ago. Railroad operator Burlington Northern saw business drop off during the end of the quarter. According to the Association of American Railroads, March carloads were down 6% year-over-year.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="“The decrease is principally a result of the negative impact on volumes of the COVID-19 pandemic,“ the company said in its 10-Q filing.” data-reactid=”83″>“The decrease is principally a result of the negative impact on volumes of the COVID-19 pandemic,“ the company said in its 10-Q filing.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Elsewhere, chemicals supplier Lubrizol saw revenue decline 4.3% year-over-year, at least partially due to capacity disruptions stemming from a fire at one of the unit’s French plants.” data-reactid=”84″>Elsewhere, chemicals supplier Lubrizol saw revenue decline 4.3% year-over-year, at least partially due to capacity disruptions stemming from a fire at one of the unit’s French plants.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Sam Ro&nbsp;is managing editor at Yahoo Finance. Follow him on Twitter:&nbsp;@SamRo” data-reactid=”86″>Sam Ro is managing editor at Yahoo Finance. Follow him on Twitter@SamRo

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<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="For tutorials and information on investing and trading stocks, check out&nbsp;Cashay” data-reactid=”95″>For tutorials and information on investing and trading stocks, check out Cashay

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