Buffett's Berkshire expected to post a quarterly earnings surge as market comeback boosts portfolio

Warren Buffett

Gerry Miller | CNBC

Investors are preparing for a variety of news in Berkshire Hathaway's second-quarter earnings report this weekend, ranging from the possibility of record overall net income to weaker operating results from the conglomerate's industrials companies.

Wall Street also hopes that Berkshire, which is expected to report per-share earnings of $2.12 and revenues of $61.08 billion per StreetAccount estimates, may have ramped up its buyback program in the three months ended June 30. The results are due Saturday morning.

What's expected to be a banner quarter for Berkshire net income is thought to be thanks in large part to a robust 20% rally in the S&P 500, a surge that will invariably boost the conglomerate's extensive stock portfolio.

UBS, for example, expects net income to reach a record $37.7 billion.

Apple, one of Berkshire's top holdings, is surely a big reason for the forecasted pop in earnings. The iPhone maker, Berkshire's largest common stock position, rallied more than 43% in the second quarter and is up more than 54% this year.

Operating results

While record net income would be a noteworthy accomplishment, it may mean less considering the second quarter was strong for much of the U.S. stock market, according to Bill Stone, chief investment officer at Stone Investment Partners.

"Berkshire's 2Q net earnings will almost certainly be impressive," Stone wrote in an email. But "investors should be more interested in the operating earnings since that reflects the real earnings power of the firm."

Instead, Stone said he'll be paying greater attention to the performance of Berkshire's operations, something that Buffett himself recommends because quarterly gains and losses in the stock market can be fleeting.

Some companies, such as Berkshire's railroad BNSF, could feel an acute impact from the economic downturn and a slower road to recovery. Its apparel and footwear makers were also likely hurt.

Others, such as auto insurer Geico, could see a more mixed outcome, Stone said. 

"Berkshire is diversified across many businesses and various pieces will be impacted to a greater or lesser degree. I'll be looking at how these businesses are rebounding," he wrote. "Insurance will be another interesting area, particularly with Geico, as less driving almost certainly reduced claims but will be offset to some extent by customer rebates."

Utilities, often seen by investors as a bond proxy, could even be a source of strength in the second-quarter report, Stone said.

Buying back stock?

But despite expectations for a blowout net income number, Berkshire's equity lagged the market during the second quarter and actually slipped 2.36%. That's all the more reason investors should be paying attention to how much of its own stock Berkshire purchased in the second quarter, according to UBS analyst Brian Meredith.

"One of the biggest frustrations with Berkshire has been its minimal share buyback despite its shares trading at a significant discount to intrinsic value and its massive cash position," Meredith wrote on July 28. "BRK's shares continue to look inexpensive, and further elevated share buyback should drive upward re-rating with its shares."

That sentiment was echoed by Stone, who said that "it will be interesting to note how much stock Berkshire repurchased in 2Q." He added that repurchases "could provide support for a continued rally, since investors will assume that Buffett and Munger considered the stock undervalued if buybacks picked up."

Berkshire shareholders have in recent years grown more insistent that the conglomerate finds something to do with its massive $137 billion cash hoard by either investing in more companies or returning wealth to investors. 

Buffett, known on Wall Street for his no-frills, bargain-based buying prowess, appeared more cautious about the state of the U.S. economy during Berkshire's annual shareholder meeting in May.

For an investor revered for aggressive deal hunting, his move to dump all of Berkshire's airline holdings and inability to ink preferred-stock bets during the economic downturn may have come as a surprise.

The company seemed to have listened to those investor demands a bit more in the second quarter. Analyst Meredith said recent regulatory filings suggest Berkshire has repurchased some $5.3 billion of its shares from April 23 to July 7, marking a "significant" increase from prior quarters.

Berkshire also struck a deal for natural gas assets in July and made slow-but-steady purchases of at least $2 billion of Bank of America over 12 consecutive business days of buying through August 4. That brought the conglomerate's total stake in the lender to a value of almost $26 billion and represented 11.9% of the bank's equity.

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