Berkshire May Post First Book-Value Drop in Five Quarters on Equity Bets

Berkshire Hathaway Inc. (BRK/A) may post its first quarterly decline in book value in more than a year on drops in Wells Fargo & Co. (WFC), American Express Co. (AXP) and Chairman Warren Buffett’s equity-derivative bets.

Book value, a measure of assets minus liabilities, may have slipped to $97,868 per Class A share on Sept. 30 from $98,716 on June 30, said Jay Gelb, an analyst at Barclays Plc, who has an “overweight” rating on Omaha-Nebraska-based Berkshire’s stock. Meyer Shields of Stifel Nicolaus & Co. published an end-of-third -quarter estimate of $98,491.

“That’s largely driven by the decline in equity markets, which have seen a nice rebound so far in the fourth quarter,” Gelb said in an interview. “It’s reasonable to expect sustained book value growth again starting with the current quarter.”

Buffett, 81, is adding investments after a market slump pressured Berkshire’s more-than $65 billion stock portfolio and its equity derivatives, which have about $35 billion at risk. The Standard & Poor’s 500 Index had its biggest quarterly decline since 2008 during the period, as Buffett spent a total of $18 billion on common-stock bets, Bank of America Corp. preferred stock and the takeover of Lubrizol Corp. On Sept. 26, Berkshire announced a plan to repurchase shares.

Berkshire’s per-share book value slipped 3 percent in last year’s second quarter as the S&P 500 dropped 12 percent. In the nine years ended in June, Berkshire book value declined in 5 quarters, never in one of the 23 when the index advanced.

Quarterly Declines

The S&P 500 slid 14 percent in the third quarter, as did Wells Fargo. Berkshire is the biggest shareholder in the San Francisco-based bank, with a stake of about 6.7 percent. American Express, the biggest credit-card issuer by purchases, slipped 13 percent in the period. Berkshire is also American Express’s top shareholder, with a 13 percent stake.

The S&P 500 had advanced 11 percent since the end of the quarter through yesterday, while Wells Fargo gained 7 percent and American Express rose 15 percent.

Book value, which Buffett highlights on the first page of his annual letters, will help determine how much the company spends on its buyback. Berkshire, which had $47.9 billion of cash at the end of June, said it won’t buy shares for more than 110 percent of book value or reduce cash holdings below $20 billion. Berkshire is set to report earnings later today.

“Their self-imposed limit depends on book value,” Shields, who has a “hold” rating on Berkshire, said of the repurchase. If “book value takes a hit, then they’re still constrained to not buy back stock at more than 10 percent above that level.”

Berkshire Shares

Berkshire Class A shares advanced $1,821, or 1.6 percent, to $118,300 yesterday in New York. The company has declined 1.8 percent this year to trail the S&P 500, which has gained less than 1 percent.

Buffett has boosted Berkshire’s book value per share from $19 in the 1960s. Stock picks like the $1 billion of Coca-Cola Co. (KO) that Berkshire bought in the 1980s have risen more than 10- fold. Takeovers such as See’s Candies in 1972 and Geico Corp. in 1996 have generated earnings that Buffett reinvested. Berkshire doesn’t pay a dividend.

The equity-derivatives portfolio, which Buffett built in the last decade to speculate on long-term gains in stocks, weighs on earnings and book value when markets and the dollar fall. As of June 30, Berkshire had $35.9 billion of fixed- maturity holdings that Tom Lewandowski of Edward Jones & Co. said may be sold to fund new investments.

“It gives him another bullet in the chamber to go out there and repurchase some shares or go purchase some companies,” said Lewandowski, an analyst who has a “buy” rating on Berkshire. “He’ll put that capital to work.”

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net.

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net.

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