There might be something to the reports of economic recovery in the USA. The company most attuned to the American economy Berkshire Hathaway (NYSE: BRK.B) just posted some first quarter results that are almost too good to believe.
The 2017 Q1 results I found at ycharts were absolutely extraordinary even for Berkshire Hathaway (NYSE: BRK.A). They prove that Warren Buffett still has what it takes and there is still a lot of life left in the American economy.
There are also a few things to be afraid of in the earnings report. Some of the numbers that will attract value investors should up send red flags about the U.S. and world economies.
The Incredibly Growing Berkshire Hathaway
The incredible highlights of Berkshire Hathaway’s First Quarter 2017 earnings report include:
A $13.03 billion (€11.99 billion) increase in revenues. Berkshire finished 2016 with $223.36 billion (€205.61 billion) in revenues and reported $236.39 billion (€217.60 billion) worth of revenues on March 31, 2017.
A net income of $22.55 billion (€20.76 billion). Interestingly enough Berkshire Hathaway’s net income actually fell during the first three months of 2017. It was $24.07 billion (€22.16 billion) on December 31, 2016.
A profit margin of 6.23%.
A free cash flow that grew by $12.11 billion (€11.15 billion). BRK.A finished 2016 with a free cash flow of $3.839 billion ($3.53 billion) that grew to $15.95 billion (€14.68 billion) three months later.
Assets that increased by $33.60 billion (€30.93 billion). Buffett’s organization finished 2016 with $620.85 billion (€571.50 billion) in assets that grew to $654.45 billion (€602.43 billion) at the end of first quarter 2017.
A bank account that grew by $10.09 billion (€9.29 billion). Berkshire Hathaway (BH) reported $86.37 billion (€79.50 billion) in cash and short-term investments on New Year’s Eve 2016. That number grew to $96.46 billion (€88.79 billion) by the end of March 2017.
A $9.60 billion (€8.84 billion) drop in cash from financing. Berkshire brought in $12.79 billion (€11.77 billion) in cash from financing in December 2016 and $3.193 billion three months later.
A $10.86 billion ($10 billion) increase in cash from operations. Berkshire’s operations generated $32.53 billion (€29.64 billion) in cash in December 2016 and $43.49 billion (€40.03 billion) in March 2017.
Should we be Scared of Berkshire Hathaway?
There is one scary figure in Berkshire’s first quarter results and that’s cash and short-term investments. Why has Uncle Warren stashed $96.46 billion (€88.79 billion) in the bank?
An obvious and frightening reason is that Buffett and crew think the U.S. economy is on shaky economic ground. They think something is about to give in the American economy, and when it does they plan to go shopping.
Buffett has a long history of snatching up bargains at rock prices after financial crises. He bought Fruit of the Loom out of bankruptcy court after the Tech Wreck of 2000. More recently BH bought the Burlington Northern-Santa Fe (BNSF) railroad and Kraft Heinz after the Great Meltdown of 2008.
Naturally many people will wonder if Uncle Warren’s sudden accumulation of vast amounts of new floats is a sign of something bad about to happen. They might wonder if Buffett thinks a stock market correction or a real estate crash is about to hit.
What will Buffett Do Next?
There are two other explanations for all the cash. The first is that Berkshire is gearing up for another major acquisition.
What that would be is unclear but there are some great brands out there that are struggling including Kellogg (NYSE: K). There are also some cheap consumer favorites including Ford (NYSE: F) and Apple (NASDAQ: AAPL). Remember Buffett loves consumer brands, especially those with a strong following. He also loves industrials and railroads.
One target might be the Kansas City Southern (NYSE: KSU) a railroad that would in with the BNSF. Another would be a Canadian railroad or a big utility.
Another intriguing possibility is corporate paper. Buffett likes the bonds of some companies particularly Amazon (NASDAQ: AMZN). Amazon is growing like crazy and it has been issuing a lot of corporate paper.
We need to watch all that cash at Berkshire carefully because history teaches us one thing. Buffett never sits on money; he puts it to work in some way.
Berkshire Hathaway is still a Great Investment
One thing is clear here, BRK.B is still a great investment. Even at the $163.09 (€150.13) a share it reached on May 11, 2017, it was fairly priced. Investors were also rewarded with a return on equity of 8.25%.
No matter what else happens; including Uncle Warren’s death, I still view Berkshire Hathaway as a widows and orphans stock. That is an equity one would buy for people that need income from investments. BH is safe; it keeps growing and making money. What else could you ask for in a stock?
A slightly different version of this article appeared at Market Mad House.