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Berkshire Q2 2020 report


gfp
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https://berkshirehathaway.com/qtrly/2ndqtr20.pdf

 

 

At first glance, my impression is that operating earnings as a whole held up remarkably well. 

 

$10 Billion goodwill write-down at PCP.

 

No Apple shares were sold during the quarter.

 

Berkshire's share count at the end of the quarter was 1.60064 million A share eq.

 

Berkshire's share count on 7/30/2020 was 1.59214 million A share eq.

 

So he continued something like $2.3-2.45 Billion worth of additional share repurchase in the month following quarter end, before most of the recent run up in price.

 

Year to date share repurchase is somewhere around $9.8 Billion worth (didn't figure this at cost, just ball park using $300k/sh)

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I think we are starting to see a ceiling put on excess capital. I (and everyone) expected this Pre-covid when they announced fully discretionary repurchase and then covid delayed it; but it seems like excess capital build has plateaued and 4-5%/year share count reduction should be a reasonable base case assuming share price cooperates

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On the resiliency of the operating earnings figure - operating earnings for the quarter is propped up by GEICO's underwriting gain ($2 Billion pre-tax for the quarter) in a major way.  They mention that because they handle the COVID "give back" differently than many carriers (they give you a discount for the length of your policy vs. many carriers taking it month-by-month on a wait and see basis), this will result in higher reported profitability at the beginning (Q2) and potentially lower profitability or even underwriting losses towards the end of the period (12 months out from the start of the give-back, since 6 month auto policies will be renewing throughout the 2nd half of this year)

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Bloomberg is reporting $5 billion share buyback in the quarter.

 

Yeah - Berkshire actually included it in the Earnings press release for the first time (I believe)

 

Approximately $5.1 billion was used to repurchase Berkshire shares during the second quarter bringing the six month total to $6.7 billion.
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Cost basis of stocks labelled :"Banks, insurance and finance" reduced by USD 9.255 B [uSD 40.149 B - USD 31.164 B] in the first six months of 2020.

 

"Big Five" comment on p. 9 changed & "boiled down" to "Big Four" comment, WFC now omitted EOP 2020Q2 [, while it was a "Big Five" comment EOP 2020Q1].

 

Sales of stocks in 2020H1 at USD 15.743 B, ref. cash flow statement.

 

I wonder if Mr. Buffett has been off-loading WFC aggressively in 2020Q2? ["Horse-change" to going really heavy on BAC from here?]

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As we know, Buffett didn't do any repurchases in April.  But if one adds May, June, July together - its a 3 month stretch where he repurchased 41.8m B-share equivalents for ~$7.5B (depending on avg price of July purchases).  If the share price rises from here, that pace will likely slow down - but that's a $30B annualized rate.

 

Perhaps, Buffett is going to be a steady repurchaser of shares from here on in -- unless BRK gets too overvalued  8) .

 

wabuffo

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Cost basis of stocks labelled :"Banks, insurance and finance" reduced by USD 9.255 B [uSD 40.149 B - USD 31.164 B] in the first six months of 2020.

 

"Big Five" comment on p. 9 changed & "boiled down" to "Big Four" comment, WFC now omitted EOP 2020Q2 [, while it was a "Big Five" comment EOP 2020Q1].

 

Sales of stocks in 2020H1 at USD 15.743 B, ref. cash flow statement.

 

I wonder if Mr. Buffett has been off-loading WFC aggressively in 2020Q2? ["Horse-change" to going really heavy on BAC from here?]

 

I wouldn't be surprised.  We'll find out in the 13-F.  He has made several statements in CNBC interviews and the like that he doesn't typically "trim" positions.  Once he starts selling he usually finishes.  I thought that perhaps WFC was an exception to this since he seemed to be price-sensitive in his sales (he stopped selling earlier this year).  But if he blew it out in Q2 that would say a lot.

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So I am sure WEB wasn't lying, or doing his best Billy Boi Ackman impression, but given the figures....he'd have to have started buying back a more reasonable chunk of stock....right around the time of the AGM. Which, given what his tone was...is surprising.

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So I am sure WEB wasn't lying, or doing his best Billy Boi Ackman impression, but given the figures....he'd have to have started buying back a more reasonable chunk of stock....right around the time of the AGM. Which, given what his tone was...is surprising.

 

One would assume the price dropping back towards $250k / A share got his attention.  And of course the economic outcomes seemed to narrow and become more clear.  Fed was going to lock BRK out of any type of financing deals, BRK stock went down for more than a couple days, big increase in cash from stock sales in the investment portfolio, etc.

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More detail on the carnage at Precision CastParts -

 

PCC’s revenues were $1.8 billion in the second quarter and $4.2 billion in the first six months of 2020, decreases of 32.5% from the second quarter and 19.5% from the first six months of 2019. In the second quarter and first six months of 2020, PCC experienced significant declines in aerospace markets. The COVID-19 pandemic produced material declines in commercial air travel during the second quarter. Airlines responded by reducing and/or cancelling aircraft orders, which is resulting in significant reductions in build rates by aircraft manufacturers and significant inventory reduction initiatives being implemented by PCC’s customers. Further, Boeing’s ongoing 737 MAX aircraft production issues have contributed to the declines in aerospace product sales in the second quarter and first six months of 2020.

PCC incurred a pre-tax loss of $78 million in the second quarter of 2020 compared to pre-tax earnings of $481 million in the second quarter of 2019. The earnings decrease reflected the decline in aerospace products sales, which contributed to reduced manufacturing efficiencies and lower gross sales margin rates. In addition, PCC management is undertaking aggressive restructuring actions to resize operations in response to reduced expected volumes in aerospace markets. During the first six months of 2020, PCC reduced its workforce by approximately 10,000 employees representing about 30% of its total workforce at year end 2019. Restructuring costs and inventory and fixed asset write-downs in the second quarter of 2020 were approximately $250 million. Earnings as a percentage of revenues are expected to continue to be negatively impacted through 2020 due to inefficiencies associated with aligning operations to reduced aircraft build rates. We believe the duration and severity of the pandemic and the long-term effects on commercial air travel and aerospace industries remains unclear.

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Yikes.  I could see the WFC dropping out of the "big 5" based on stock price movements (his stake would only be worth ~$8 billion without any sales so just another of several holdings in the size range) but the basis reporting....

 

Thanks, CorpRaider,

 

- I think it must be evident to the reader, that I'm not a WFC shareholder directly! [ : - ) ]

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The more you look, the more it seems he must have sold all or almost all of the Wells Fargo position in the 2nd quarter.  Berkshire held 345.689 million WFC shares at the end of the year at a cost basis of $7.04 Billion (avg CB 20.365 / WFC share).  Berkshire did not sell much, if any, WFC in the 1st quarter (reported Wells as $9.9 Billion at market at end of 1st Q).

 

This note in the section on realized gains/losses shows how the losses recorded in the 1st quarter (as unrealized pass through the income statement) became realized in the 2nd quarter. - from page 11 of the most recent 10-Q:

 

"The losses on securities sold in the first six months of 2020 ($11.2 billion) include losses of $10.7 billion from market value changes in the first quarter on securities that were sold in the second quarter."

 

And as John noted above, the Cost Basis for the equities category Banks, Insurance and Finance declined by $9.681 Billion during Q2. 

 

No wonder WFC share price has been so weak!  There was a 345 million share seller in the market

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Yeah if they had sales of $13.6 billion - $6.5 billion for the airlines; So the sales couldn't be the whole WFC stake (in the quarter), could it?

 

Not sure what else it could be besides Wells.

 

Let's see, he sold 3% of JPM in prior quarter (one of the few big banks where he was nowhere near the 10% mark).  If he sold all of that and BK (I mean he was buying that while Scharf was the CEO) that would get near the 7 billion in sales but no idea about the basis.

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The more you look, the more it seems he must have sold all or almost all of the Wells Fargo position in the 2nd quarter.  Berkshire held 345.689 million WFC shares at the end of the year at a cost basis of $7.04 Billion (avg CB 20.365 / WFC share).  Berkshire did not sell much, if any, WFC in the 1st quarter (reported Wells as $9.9 Billion at market at end of 1st Q).

 

This note in the section on realized gains/losses shows how the losses recorded in the 1st quarter (as unrealized pass through the income statement) became realized in the 2nd quarter. - from page 11 of the most recent 10-Q:

 

"The losses on securities sold in the first six months of 2020 ($11.2 billion) include losses of $10.7 billion from market value changes in the first quarter on securities that were sold in the second quarter."

 

And as John noted above, the Cost Basis for the equities category Banks, Insurance and Finance declined by $9.681 Billion during Q2. 

 

No wonder WFC share price has been so weak!  There was a 345 million share seller in the market

 

This is a very good catch, gfp,

 

Suddenly one has a perception of a very active quarter with regard to the Berkshire stock portfolio, the airlines got the boot/ax [ref. CorpRaider's last post [yes, we have to remember those disposals, too]] and now this material decline in [likely] banking exposure.

 

Add to that, a reasonable share buyback at what I consider very good prices, ref. wabuffo's last post in this topic.

 

In short, Mr. Buffett hasen't been spending all his office time during that last quarter on the couch, at the Coke dispenser in the office, or inhaling burgers!

 

- - - o 0 o - - -

 

With regard to WFC, I just looked up how long that investment relationship has lasted by now for Berkshire [, using the shareholders letters]. The first 5 million shares were visible there for the first time in the 1990 shareholder letter - That's 30 years by now!

 

I wonder how much cash that investment must have thrown off / generated over the years? - It must be a lot!

 

If Berkshire is indeed exiting WFC now, it's almost an emotional moment.

 

Yes, we better stay open minded and just wait for the 13-F/HR, ref. gfp & CorpRaider.

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bloomberg tracks historical ownership.

 

Berkshire share ownership of WFC for select dates:

 

1999: 57mm

2000: 15mm (it went down?)

2001-2005: 100-110mm

2005: goes down then goes up to 190mm

300mm by 2007/8, peaks at 495mm in 2015 then down to 345mm at last disclosure.

 

I have no idea as to the accuracy of that or if WFC ever split stock or did stuff that distorted those figures. Bloomberg estimates that the total current position has a cost basis of $21-$25/share, which is great in that Berkshire is likely for the most part realizing losses as it sells (as with the airlines) and has realized $7.5B of losses through Q2. I wonder if this sparks any further actions in the stock portfolio with highly appreciated / stagnant positions.

 

 

 

 

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It seems fairly accurate.  Berkshire's cost basis on the 345 million shares it still had this year was $7.04 Billion - an average of $20.365 / WFC share.  We know this from the latest annual report.

 

Berkshire is very careful in selecting which lots it sells, so had likely sold the highest basis lots up until this recent quarter to maximize the tax deferral. 

 

 

bloomberg tracks historical ownership.

 

Berkshire share ownership of WFC for select dates:

 

1999: 57mm

2000: 15mm (it went down?)

2001-2005: 100-110mm

2005: goes down then goes up to 190mm

300mm by 2007/8, peaks at 495mm in 2015 then down to 345mm at last disclosure.

 

I have no idea as to the accuracy of that or if WFC ever split stock or did stuff that distorted those figures. Bloomberg estimates that the total current position has a cost basis of $21-$25/share, which is great in that Berkshire is likely for the most part realizing losses as it sells (as with the airlines) and has realized $7.5B of losses through Q2. I wonder if this sparks any further actions in the stock portfolio with highly appreciated / stagnant positions.

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If you are asking what book value was at the end of Q2, it is $393.495 Billion.  On 6/30/2020 that was 163.89 per B share.  It is higher currently, if that is what you are inquiring about.  There are quite a few moving parts to estimating real-time BVPS, but I would assume it is over $170 per B-share.

 

What do you have current B.V. pegged at given the current Q?

 

Also - it looks like BNSF was better slightly better then expected IMHO

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I just rechecked my Berkshire WFC share numbers posted here on CoBF today in this topic :

 

Number of WFC shares YE1990  : 5,000,000 [source : Max Olson, "Berkshire Hathaway Letters to Shareholders 1965 - 2014", p. 275 [introduction signed by our fellow board member Max March 3rd 2015], &

Number of WFC shares YE1989 :  0 [zero] [same source, p. 253.]

 

There may be explanations for this [, ref. the source], but which explanation is the right one?

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In terms of valuation – I view BRK right now as a 65-68 cent dollar, with limited downside due to cash.  I’ve valued the biz all sorts of ways: DCF, SOTP, float as a negative carry, % of stock portfolio income etc etc.  For me the purest and simplest way know; knowing full well, that it is better to be roughly right, then precisely wrong:

 

•BRK Market Cap ($500B) – stock portfolio ($230B) – BNSF ($110B) – Cash ($145b) = $480B.  This tells me you are getting ALL Insurance – which generates 45% of pre-tax income, Utilities – which is extremely stable, and the whole MSR group of businesses at call it $20B.  Does that make sense from a valuation perspective?  NO.  Which is why we’ve seen nice buybacks over the past few months. 

•The real question is what the IV of the BIZ is 

 

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So I am sure WEB wasn't lying, or doing his best Billy Boi Ackman impression, but given the figures....he'd have to have started buying back a more reasonable chunk of stock....right around the time of the AGM. Which, given what his tone was...is surprising.

 

To me, this post by Greg takes the palms as the CoBF post of today.

 

To me, it's mind provoking, actually. I have to go back and listen to the 2020 AGM video again. Talk to me about getting [or being] mind fucked with regard to Berkshire share buybacks. Back then, I should have been ridiculed here on CoBF for my sharing of huge Excel spreadsheats, hitting the bulls eye for the first quarter, after which just about everything collapsed! .... LOLz!

 

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