The Most Comprehensive Trading Plan Ever for Berkshire Earnings on May 6

Warren Buffet's Berkshire Hathaway is set to announce 2011 Q1 earnings May 6th after the market closes. Berkshire has been rocked in recent months with the scandal involving former top lieutenant and long speculated heir-to-the-Berkshire-throne David Sokol. Sokol resigned in March following the revelation that he traded in shares of Lubrizol LZ prior to the acquisition of the company by Berkshire in March. In a letter released in March, Warren Buffet defended Sokol, going so far as to say that none of his purchases of Lubrizol were “in anyway unlawful.” Nevertheless, an 18-page report released by the company last week alleges that Sokol violated Berkshire's insider-trading policies and code of ethics, although Sokol denies any wrongdoing. The disaster in Japan has also negatively affected Berkshire. On Sunday, Berkshire announced that its Q1 profit was $1.5 billion, down 58% from 2010's Q1 profit of $3.6 billion. This decline in profit is largely due to the payouts Berkshire's insurance business has had to make following the catastrophe in Japan. The Lubrizol Corporation announced earnings for its first quarter last week of $169.5 million, up from its first quarter earnings in 2010 of $162.3 million. This could prove bullish for Berkshire, but seems unlikely to have a similar effect as 2009's acquisition of railroad Burlington Northern. The purchase of Burlington was financed by increasing the outstanding B-class Berkshire share count. This change in outstanding stock increased the liquidity of Berkshire enough so as to allow the stock to be added to the S&P 500 index. Of interest, the inclusion of the more liquid BRK.B stock on the S&P 500 index allowed fund managers to invest in Berkshire, which was partially responsible for the rally in BRK.B last year from $65 to around $80. Burlington Northern's CEO seemed optimistic in an interview with FOX Business last week. When questioned on rising fuel prices, the CEO stated that higher fuel prices actually is helpful to the railroad industry, at least until the point at which the cost of fuel puts a damper on the economy enough to lower demand for railroad shipments themselves. Berkshire announced Q4 earnings for 2010 at the end of February, which occurred prior to a large rally in the stock. Berkshire A-class stock rallied to over $130,000 before selling off in mid-March on the heels of the Sokol scandal. The stock is presently sitting around the $122,000 dollar range, just slightly above its yearly lows. Also relevant to Berkshire's earnings announcement on May 6 are its dealings with banking magnate Goldman Sachs GS. Following the economic collapse of 2008, Berkshire purchased 10% of Goldman's preferred stock in a quasi-bailout. In March, Goldman announced that it would repurchase these shares from Berkshire at a price of $110,000 plus accrued and unpaid dividends and completed the purchase by April 18th. The payment of $1.64 billion in dividends to Berkshire was disastrous for the bank's earnings, which plunged 72%. Berkshire made out handsomely on its investment — receiving its original $5 billion investment back in addition to the dividend payments plus a $500 million early repayment fee. Berkshire still holds the rights to purchase 43.5 million common shares of the bank at a price of $115 per share. This right expires in the fall of 2013, but will be profitable as long as Goldman continues to trade around its current level of $150 per share. Analysts estimate a Q1 earning of $0.64 for Berkshire on May 6th, down from last quarter's estimate of $1.20. Berkshire's P/E ratio is pegged at $18.20, below the sector average of $21.04. Buffet announced that he estimated $1.5 billion in net income for Q1 last weekend, but declined to provide earnings per share.