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Morgan Stanley Recaps Berkshire Hathaway's Q1 Print, Annual Meeting

AAPL, WFC, KHC | May 7, 2018

Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) reported first-quarter results Saturday that showed a $1.1-billion net loss — and 49-percent jump in operating earnings.

The Analyst

Morgan Stanley's Kai Pan maintains an Equal-weight rating on Berkshire's Class B stock with an unchanged $210 price target.

The Thesis

As expected, new accounting rules prompted Berkshire to post a $1.1-billion net loss in the first quarter, Pan said in a Monday note. At the same time, the Omaha, Nebraska-based company's $5.3-billion operating earnings not only rose 49 percent from a year ago, but represent a record quarter.

Pai attributed the strength in the quarter to the following:

Improving results in underwriting.
Growth in manufacturing, service and retail.
Strength in the railroad segment.
Lower tax rates.

Berkshire's cash balance reached $108 billion — and Berkshire CEO Warren Buffett is unlikely to approve a regular or special dividend, Pan said. The stock's valuation isn't compelling enough for Buffett to authorize large-scale share buybacks, but he's likely open to deploying cash for more equity investments, the analyst said.

Morgan Stanley broke down Buffett and Berkshire Vice Chairman Charlie Munger's comments by the sectors in Berkshire's business:

Banks: Wells Fargo & Co (NYSE: WFC) made big mistakes, but should be able to fix itself and become a large, well-run bank.
Consumer: Organic growth at Kraft Heinz Co (NASDAQ: KHC) won't be as large as in the past, and Duracell earnings are still below the levels seen prior to the acquisition.
Health care: The joint venture project to generate significant changes in the system won't be an easy task, but the company will "at least give it a try."
Industrials: Precision Castparts is gaining market share, but McLane margins are down 50 percent since it was acquired.
Insurance: GEICO's underwriting margin of 8 percent was better than expected and favorable trends continued in April.
Payments: Buffett's commentary gives the impression the firm is "not sure how the payment space will play out."
Technology: Berkshire already owns 5 percent of Apple Inc. (NASDAQ: AAPL) and could lift its ownership to as much as 7 percent over time.
Utilities: Berkshire is looking for "intelligent ways" to deploy its capital in utilities and generate attractive returns.
Acquisitions: "Fewer acquisition opportunities" are available to Berkshire as of today.