Tuesday, August 8, 2017

Quality of Earnings: JPMorgan Chase vs Berkshire Hathaway

For the First Half of 2017, JPMorgan Chase generated Net Income of $13.477 Bil, up a very robust 15% from the comparable First Half of 2016 Net Income of $11.720 Bil.

On the other hand, Berkshire Hathaway posted First Half of 2017 Net Income of $8.494 Bil, down 21% from the comparable First Half of 2016 Net Income of $10.739 Bil.

So, JPMorgan Chase performed much better than Berkshire Hathaway in the First Half of 2017?

Actually, I think just the opposite.

Berkshire Hathaway has more than $150 Bil in Investments in Equity Securities on its balance sheet.

With the strong stock market in the first half of 2017, primarily driven by the surprisingly best ever 4Q 2016 Total Earnings Growth of 55% for all US Companies with stock market caps above $1 Bil which mostly wasn't disclosed by these Companies until late January 2017 or in February 2017 in their 4Q Earnings Releases, where does this economic appreciation of these Equity Securities appear on its income statement?

Well most of it isn't in Berkshire's regular Net Income.  Instead, it appears in Berkshire's Comprehensive Income as Net Change in Unrealized Appreciation of Investments which was shown as a staggering $13.088 Bil Pretax for the First Six Months of 2017.

Thus, the more relevant to investors in Berkshire's First Half of 2017 Comprehensive Income was $17.909 Bil, up an incredible 138% from the $7.520 Bil of comparable earnings in the First Half of 2016.  Whew!

On the other hand, JPMorgan Chase's Pretax Income for the First Half of 2017 was $18.090 Bil, up 7% from the First Half 2016 Pretax Income of $16.918 Bil.

So, why is it that growth of JPMorgan Chase's Net Income for the First Half of 2017 of 15% is more than double the 7% growth in its Pretax Income for the same period?

It's all in the fact that JPMorgan Chase used a much lower income tax rate of 25.5% in the First Half of 2017 than it did in its First Half of 2016 of 30.7%.  Whoa!

What's with this dramatically lower income tax rate?

Well, I good chunk of it came from JPMorgan Chase lobbying successfully to change how its Subpart F foreign income is treated in the tax loophole laden PATH Act of 2015.

So can you see why CEO Jamie Dimon is now so loudly and aggressively lobbying for another huge income tax break for JPMorgan Chase?

The last one roughly more than doubled JPMorgan Chase's earnings growth in the First Half of 2017.

And after tax earnings growth drive stock prices and JPMorgan Chase's higher level executives receive a lot of their compensation in the Company's stock.

If Donald Trump gets his wish to dramatically lower the US Federal Income Tax Rate on Foreign Earnings Repatriated back to the US, only one thing is certain ..... just like it did last time, no US jobs were created in the aggregate, instead many jobs were lost from the layoffs occurring as a result of the many large mergers from this massive amount of cash repatriated back to the US.

I couldn't say it more boldly ..... Foreign Earnings Repatriation Results in Substantial Income Inequality Expansion.