No. of Recommendations: 24
The falloffs in earnings within the utilities and rails are quite depressing.
It takes some fairly careful assessment to determine how much of that is one-time versus cyclical versus permanent.
In constant collars, trailing four quarters net income at the railroad is down -21% from the rolling year peak, and net income at BHE down -38% from the rolling year peak.
For rails, this is the seventh quarter of falling TTM net income. First slowly, then rapidly.
The explanation is mostly simple: lower volumes and higher non-fuel costs. The volumes are presumably almost entirely a cyclical problem that could be ignored. As for the costs, beats me.
If doing a cyclical adjustment, I figure the railroad can probably make on average at least the lowest real rolling-four-quarter figure that they managed in recent years.
I took all the inflation adjusted figures for rolling years ending mid 2019 through end 2022. If you take the lowest, the four quarters to 2020-Q3, that adjusts the net income for rails up by $814m for the last four quarters.
For utilities, there are several issues, but the biggest is certainly the $1.6bn year to date in liability provisions for the 2020 wildfires. The cumulative provision is now $2.4bn. It's hard to assess what the business is worth while taking this into account. The final number may get higher. An optimist would see it as a truly one time loss, even though it may get bigger. The pessimist may see this as a long term trend of utilities being held liable for third party damages from time to time, meaning it's a permanent hit to the earning power...again of an unknown size. So, for a cyclical adjustment I took an approach like the one above: ignore the long term uptrend of real earnings in the utilities division due to expansion. Simply look at the lowest inflation-adjusted rolling-four-quarter net earnings in the last few years, and use that number as a proxy for the forward earning power. In this case I took the lowest number in the range calendar 2020 through to the year ending June 2023. Using that figure rather than the actual trailing four quarters figure would make the net income for BHE $1.12bn higher. Even though that's an after-tax number, it's still a smaller adjustment than the loss provisions in the last year.
The sum of those two cyclical adjustments, if I decide to stick with them, would bump net income in the operating subs by $1.934bn. That leaves the sum of real operating earnings among the "steady" things I track -1.7% off their peak instead of -8.7% off their peak. The four horsemen of the "steady" things are rails, utilities, MS&R+equity method, and a cyclically adjusted estimate of underwriting profit.
But wait, there's more.
The Homeservices lawsuit judgment is also quite the thing. As it only happened Tuesday, I'm pretty impressed they got a good write-up into the 10Q! I am going to ignore that one for now. That selective blindness is built on the following rationales: (a) because of appeals the final amount which will actually be paid in these cases is not yet known, (b) this decision may restructure the entire business model and have serious implications for the future earning power which I can not yet fathom, and (c) therefore I want to kick it down the road. That sounds overly sanguine, but if (a big if) it's a one time loss it's probably down in the rounding error of valuation exercises for a company the size of Berkshire.
Jim
