Market Overview

S&P Berkshire Hathaway Downgrade


Berkshire Hathaway Inc (BRK.B) The rising interest rates may impact Berkshire Hathaway’s performance in markets within the next years. The company reported a solid first quarter hitting new record highs. $500 million of 4.3 percent bonds due May 2043 rose 0.7 cents last month.  First-quarter operating earnings of $3.782 billion, or $2,302 per Class A share, increasing from $2.665 billion, or $1,615 billion per Class A share, during the first quarter of 2012 were also reported. First-quarter revenue totaled $43.867 billion, increasing from $38.147 billion in the first quarter of 2012. Average volume has been 3.9 million shares over the past 30 days.


Warren Buffett also showed to investors during a recent shareholder meeting its expectations of underperformance by Berkshire Hathaway in relation to the S&P 500 Index. Last month, Standard & Poor’s downgraded Berkshire Hathaway’s credit rating because of over reliance on its insurance business. The ratings were lowered one notch to "AA" from "AA+." The S&P stated "Management succession at BRK is also an offsetting factor."


The S&P cited Berkshire Hathaway’s ratings as “risky.” Berkshire Hathaway had held the highest S&P credit rating as well as Fitch Ratings and Moody’s Investors Service since 2009. After the financial crisis of 2008, further liabilities on derivatives also caused downgrades with these ratings agencies. Overall, the company’s ratings are negative.

Berkshire Hathaway still remains strong in the bond markets. Last month it sold 5- and 30-year debt, according to Bloomberg. The extra yield for investors demand in bonds to hold the 30-year bond instead of government debt compared with a 144 basis-point spread on a Bank of America Merrill Lynch index for AA rated U.S. corporate debt maturing in 15 years or longer.


Berkshire’s market cap presently is of $190 billion, with $162 billion in revenue in 2012. The company owns tens of billions of dollars of common stocks such as Coca-Cola Co, International Business Machines Corp and Wells Fargo & Co. The company has a P/E ratio of 17.1, below the S&P 500 P/E ratio of 17.7. Even though the company has low profit margins, its strengths in  its revenue growth, operations, growth in net income and return on equity has investor’s outlook to be promising. Berkshire Hathaway’s more than 80 businesses have proven to benefit from stronger economic conditions.  Berkshire’s long term strategic growth outcome presently has gains from derivatives increased 20 percent before taxes. Derivatives have been strong due to the company’s long-term contracts related to performance in S&P’s 500 stock which had rose 10 percent in the first quarter.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Bonds Markets Trading Ideas


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