Berkshire Hathaway Inc. Earnings: Don't Trust the Headlines

After the market closed Friday, Warren Buffett's Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) posted its third-quarter results with some surprising numbers: Its net earnings fell 9% from $5.1 billion to $4.7 billion.

Warren Buffett. Image source: The Motley Fool.

While earnings per share of $2,811 topped the $2,594 analysts expected, many media outlets highlighted the sizable dip, which may cause many to wonder whether Berkshire has lost its touch.

Consider the coverage from Businessweek, headlined "Berkshire Profit Slips on Buffett's Tesco 'Mistake'," or the report by Fortune, titled "Berkshire Hathaway Earnings Take a Dip on Investments."

Although those are factual realities about Berkshire's third quarter, the problem is, they don't tell the whole story. As it turns out, investors have no absolutely no cause for concern.

The dive
A glance at the results from the businesses of Berkshire reveal where the sizable dip came from:

Instead of a gain from its investments, Berkshire lost $100 million, representing an astonishing swing of $1.5 billion to its bottom line.

And what caused this massive difference? The Businessweek headline alluded to the problem. In the third quarter, Berkshire recognized a $441 million after-tax charge related to its investment in Tesco PLC, a British grocer. In an interview with CNBC in early October, Buffett said:

Best Paper Companies To Watch For 2015

With Tesco, we definitely made a mistake. I made a mistake on that one more than anybody else made a mistake. ...That was a huge mistake by me.

As of this writing, Tesco has seen its shares fall by 45% year to date.

But it wasn't just the Tesco write-off that skewed results, because it's also critical to know that in the third quarter of 2013, Berkshire recognized an $875 million gain related to its in investments in Goldman Sachs and General Electric warrants, as well as Wrigley subordinated notes.  

This is important to recognize. As the Berkshire earnings report explains, with my emphasis added:

We believe that realized investment gains/losses, other-than-temporary impairment charges, and derivative gains/losses are often meaningless in terms of understanding our reported results or evaluating our economic performance. These gains and losses have caused and will likely continue to cause significant volatility in our periodic earnings.

So what does all that mean? In short, while these gains and losses are dollars that do or do not go toward Berkshire's bottom line, they tell us nothing of how the third quarter actually went for the businesses that make up Berkshire Hathaway.

And when you look at the foundational operating businesses of Berkshire, the picture tells a very different story.

The reason for optimism
The results of the actual operating businesses that make up Berkshire Hathaway reveal that instead of seeing earnings fall by 9%, Berkshire actually had its earnings jump by 25%:

But this, too, doesn't tell the whole story, because the Reinsurance Group often sees its earnings fluctuate widely quarter to quarter or year to year. In addition the third-quarter 2013 results don't include the newly acquired NV Energy, which posted earnings of $337 million this year.

However, even with that in mind, it's clearly evident the third quarter was a remarkably good one for Berkshire Hathaway and the businesses that compose its nearly $520 billion in assets.

The Foolish bottom line
With a company as large and complex as Berkshire Hathaway, there is much to parse through to determine exactly how well its operations are going, and this quarter is no exception. And while the loss from investments isn't exactly desirable, it's critical to remember the company's own words:

We believe the amount of investment gains/losses included in earnings in any given period typically has little analytical or predictive value. Our decisions to sell securities are not motivated by the impact that the resulting gains or losses will have on our reported earnings.

That is to say, with a company like Berkshire, there is always more than meets the eye.

Warren Buffett: This new technology is a "real threat"
While the drop in net bottom line results isn't cause for concern, at the recent Berkshire Hathaway annual meeting, Buffett admitted that this emerging technology is threatening his biggest cash cow. Buffett's fear can be your gain. Only a few investors are embracing this new market, which experts say will be worth over $2 trillion. Find out how you can cash in on this technology before the crowd catches on, by jumping on to one company that could get you the biggest piece of the action. Click here to access a free investor alert on the company we're calling the brains behind the technology.