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Berkshire May Post Biggest Gain in Book Value Since 2010

Berkshire Hathaway Inc. (BRK/A) is poised to report its biggest year-over-year increase in book value per share since 2010 on gains from investments, operating-business earnings and Chairman Warren Buffett’s equity-derivative bets.

Book value, a measure of assets minus liabilities, may have climbed 15 percent to $111,546 per share on Sept. 30 from a year earlier, according to Jay Gelb, an analyst at Barclays Plc. Cliff Gallant of KBW Inc. estimated $110,701 at the end of the third quarter. Omaha, Nebraska-based Berkshire is scheduled to report earnings after the market closes tomorrow.

“This year, this quarter, the equity portfolio has done pretty well, and that’s helped,” Gallant said in a phone interview. Berkshire’s derivatives book may report gains in the period and operating businesses were probably steady, he said.

Buffett, 82, highlights the metric on the first page of his annual report and has said that it’s the best available proxy for intrinsic value. The measure reflects changes in the company’s investment portfolio, as well as earnings from Berkshire’s more than 70 operating units that haul freight, generate electricity and sell products from underwear to candy.

“Book value is a number you can hold on to,” said Meyer Shields, an analyst at Stifel Nicolaus & Co. who estimates the figure advanced to $110,490 in the quarter. “It’s a reasonable- ish depiction of what the market thinks Berkshire is worth.”

Berkshire Class A shares have risen 13 percent this year to $129,505, compared with the 12 percent gain in the Standard & Poor’s 500 Index.

Steady Rise

The book value surged 17 percent in the second quarter of 2010 from a year earlier, to $86,661. It ended that year at $95,453 and was $99,860 at the close of 2011.

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 climbed more than 14-fold. Takeovers such as See’s Candies in 1972 and Geico Corp. in 1996 have generated earnings that Buffett reinvested. The company doesn’t pay a dividend.

Berkshire’s portfolio of U.S.-listed equities returned 3 percent in the third quarter, assuming no changes were made since June 30, according to data compiled by Bloomberg. Stakes in San Francisco-based Wells Fargo & Co. (WFC), the biggest U.S. home lender, and International Business Machines Corp. (IBM) contributed the most to the gain. Berkshire is the largest shareholder in both companies.

Insurance Business

Reduced claims costs from catastrophes stand to help Berkshire’s insurance units post better underwriting results in the period before Hurricane Sandy struck the U.S. East Coast, Barclays analysts led by Gelb said in a note last month. Earnings at railroad Burlington Northern Santa Fe, which Buffett acquired in 2010 in what he called an “all-in wager” on the U.S. economy, may improve from a year ago, the analysts said.

“We expect solid operating results at Berkshire Hathaway to continue with strong earnings growth,” Gelb and his colleagues wrote in an Oct. 1 note to clients.

Net income for the quarter may climb 80 percent to $4.11 billion from a year earlier, the analysts said. Stifel’s Shields predicted net income of $3.61 billion.

Insurers are assessing damage from Sandy, which will affect results in the current period. The storm killed at least 50 people, caused flooding, halted travel and shut U.S. financial markets. Industry losses probably will be between $7 billion and $15 billion, according to catastrophe modeler AIR Worldwide.

Berkshire probably will record gains on its equity- derivatives portfolio in the quarter, compared with a $2.1 billion loss in a year earlier, Shields said. The company collected premiums upfront on the contracts, which expire between 2018 and 2026.

Market Gains

Buffett made the bets in the last decade to speculate on long-term gains in stock-market benchmarks such as the S&P 500 Index (SPX) and the FTSE 100. Berkshire’s earnings can benefit when the indexes rise, as they did in the third quarter.

Buffett’s strategy of building book value through stock picks and by buying whole companies has become more difficult as the company’s size increased, Tom Lewandowski, an analyst at Edward Jones & Co., said in a phone interview. He estimates that book value will climb about 3 percent from the end of the second quarter, when it was $107,377.

“It’s harder to move the needle when you’re a $180 billion book value, $210 billion market-cap company,” said Lewandowski. “There aren’t as many of those great investments that he can go out and find.”

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net.

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

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