According to analysts, Warren Buffett's Berkshire Hathaway is set to report second-quarter results on Saturday, and the sharp sell-off that has plagued markets in the first half of this year is likely to take a chunk out of the company's stock portfolio and its own book value as a result.
While the metric isn't the be-all and end-all for the company, investors use it as a shorthand for the company's performance, and any weakness there will grate on them.
"Based on Berkshire's portfolio and market moves, we can expect a pretty significant sequential deterioration," said Meyer Shields, an analyst with Keefe Bruyette & Woods Inc. "For better or worse — and I think worse — people look at book value as the valuation basis for Berkshire, and if book value shrinks, the stock looks less appealing."
Market volatility isn't the only impediment. With inflation on the rise, declines in Berkshire's operating businesses, such as real estate and auto insurance, where inflation is likely to raise claim costs, could outweigh gains in the company's energy and rail units.
Insurers that have already reported earnings say they have been hard hit by rates and inflation, piqueing investor interest in how Berkshire's businesses, such as Geico, the second-largest private passenger auto insurer in the United States, and Gen Re, will fare.
Earlier this year, Buffett stated that he couldn't predict the trajectory of inflation in the coming months or years. Nonetheless, he has seen price increases in all of his businesses. Inflation, he said at the time, "swindles almost everyone."
"The operating businesses are really a microcosm for the broader economy," said CFRA Research analyst Cathy Seifert. "They are diversified, but again, diversification does not necessarily insulate them from inflation because there are very few immune sectors."
The results come just over three months after shareholders gathered in Omaha, Nebraska, for the company's first annual meeting since the outbreak began. Buffett used the gathering to tout an aggressive buying spree that included the acquisition of insurance company Alleghany Corp., an increased stake in Chevron Corp., and stock in companies such as HP Inc.
Notably, Berkshire has quickly purchased shares in Occidental Petroleum Corp., and now owns 19.5 percent of the energy company's outstanding shares. This has raised questions about whether Berkshire sees the energy firm as a potential acquisition target, despite the fact that such information is rarely included in the company's quarterly results.
"I don't think you'll get clarity" on Berkshire's intentions, according to Cole Smead, president of Smead Capital Management.
Here's what else to look out for this quarter:
Buybacks
Buffett had become increasingly reliant on stock repurchases as a means of putting money to work in a competitive dealmaking environment. As the company struggled to deploy near-record levels of cash, Berkshire repurchased a total of $27.1 billion in 2021, the highest annual level since he began aggressively repurchasing stock in 2018.
It reduced its share repurchases by $3.2 billion during the first quarter. With the market down from pandemic-era highs, repurchases may be on the decline with potential deals in sight.
"You might see fewer shares repurchased than people want," Shields predicted. "Capital is being put to increasingly appealing uses."
Stocks
Buffett enjoys a good deal, and while market volatility may have a negative impact on Berkshire Hathaway's stock portfolio, it may also present a buying opportunity.
Buffett stepped up his efforts in the first quarter after investors questioned why he didn't take advantage of the downturn when the pandemic hit. He and his investment team went on Berkshire's biggest buying spree in at least a decade, accumulating nearly $41 billion in net purchases over a three-month period.
Now, as war and inflation exacerbate market volatility, resulting in the S&P 500's worst quarter in more than two years, Buffett may keep the spigot open.
Succession
Buffett, now 91, confirmed last year that Berkshire Vice Chairman Greg Abel will take over as CEO if he leaves. Analysts believe the company is unlikely to provide more information on top-level succession plans over the weekend, with few expecting indications that Buffett or his long-time business partner, 98-year-old Charlie Munger, will step down.
According to Seifert, Alleghany CEO and former Berkshire insurance executive Joe Brandon could emerge as the logical successor to Ajit Jain, who runs the conglomerate's insurance operation.
"Warren Buffett still has a thing for Joe Brandon." "He thinks a lot of him," Seifert said. "There is a new little wrinkle in relation to maybe not top-level succession, but a couple of rungs down."