Berkshire Profit Climbs 72% on Derivatives, Railroad
Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) said profit climbed 72 percent in the third quarter as a stock-market rally helped improve results in the derivatives book and earnings at the railroad climbed.
Net income rose to $3.9 billion, or $2,373 a share, from $2.28 billion, or $1,380, a year earlier, the Omaha, Nebraska- based company said today in a statement. Operating earnings, which exclude some investment results, were $2,057 a share, missing the $2,063 average estimate of three analysts surveyed by Bloomberg.
Buffett, 82, made the equity-derivatives bets in the last decade to wager on long-term gains in stock-market indexes in the U.S., Europe and Japan. When the benchmarks fall, as they did in last year’s third quarter, Berkshire’s liabilities on the contracts can climb, pressuring earnings.
“The stock market has had a pretty good run year to date,” Cliff Gallant, an analyst at KBW Inc., said in an interview before earnings were released. “I don’t know if I’d count on it to continue.”
Berkshire’s Class A shares fell less than 1 percent to $130,550 at 4:05 p.m. in New York today. The company has advanced 14 percent this year, compared with the 12 percent gain in the Standard & Poor’s 500 Index. (SPX)
Book value, a measure of assets minus liabilities, rose to $184.6 billion from $177.4 billion at the end of June.
The loss on equity index put derivatives narrowed to $534 million from $2.09 billion a year earlier. Gains from credit- default contracts, in which Buffett bets on the ability of borrowers to repay debt, were $316 million compared with a loss of $247 million a year earlier.
Buffett’s biggest takeover, railroad Burlington Northern Santa Fe, was completed in 2010 in a $26.5 billion transaction. The business contributed $937 million to earnings, compared with $766 million a year earlier.
Berkshire has been making smaller acquisitions this year as Buffett searches for larger takeovers. The billionaire said he failed to reach an agreement on a deal valued at about $22 billion earlier this year, while his firm has agreed to buy a newspaper in Waco, Texas, a building-insulation maker and food- distributor Meadowbrook Meat Co.
Buffett’s firm agreed to pay about $500 million to buy Omaha-based party-supply retailer Oriental Trading Co., according to a person familiar with the deal who declined to be identified because the details are private. Berkshire announced the deal today without disclosing terms.
Buffett, Berkshire’s chief executive officer, chairman and controlling shareholder, has been positioning his firm for a rebound in housing. The company added to its holdings of Wells Fargo & Co., the largest U.S. home lender, expanded its real estate brokerage and won an auction for the loan portfolio of bankrupt mortgage lender Residential Capital LLC.
The billionaire said in July that the residential real- estate market was improving, even as other parts of the economy flattened out. Among Berkshire’s more than 70 operating units are businesses that make bricks, paint, insulation and manufactured homes.
Housing prices rose 2 percent in August from a year earlier, the biggest gain since July 2010, according to the S&P/Case-Shiller index of property values in 20 U.S. cities. The number of homes for sale in the U.S. dropped 18 percent in September from a year earlier, according the National Association of Realtors website.
Berkshire’s cash pile rose to $47.8 billion from $40.7 billion three months earlier.
Berkshire spent $1.18 billion on equities and $2.08 billion on fixed-maturity securities in the quarter. It sold $3.18 billion in stocks and $1.2 billion in bonds.
The insurance segment posted an underwriting profit of $392 million, compared with $1.09 billion a year earlier, when the reinsurance group led by Ajit Jain benefitted from a reduction in estimated liabilities on some contracts written in prior periods. Underwriting profit at the Geico car insurer climbed to $435 million from $114 million.
Buffett has used so-called float, or the insurance premiums Berkshire holds before paying claims, to amass the largest equity stakes in companies including Coca-Cola Co. (KO) and International Business Machines Corp. Berkshire’s stock portfolio was valued at $88 billion on Sept. 30, up from $86.2 billion at the end of June as Wells Fargo gained 3.3 percent in the third quarter and IBM advanced 6.1 percent.
Utility unit MidAmerican Energy Holdings Co. added $438 million to Berkshire’s profit, compared with $372 million in last year’s third quarter. Earnings from manufacturing, service and retailing units increased to $991 million in the three months ended Sept. 30 from $836 million in the same period in 2011 on gains at manufacturers including Marmon Holdings, the producer of construction materials.
The group of businesses includes engine-additive maker Lubrizol, which was acquired by Berkshire at the end of last year’s third quarter; Marmon; and Fruit of the Loom, which produces underwear and other clothing. Berkshire doesn’t break down results by each business.
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