Berkshire Profit Advances 29% on Railroad, Investments

Warren Buffett’s Berkshire Hathaway Inc. said third-quarter profit climbed 29 percent on investments and gains at non-insurance businesses including railroad Burlington Northern Santa Fe.

Net income rose to $5.05 billion, or $3,074 a share, from $3.92 billion, or $2,373, a year earlier, the Omaha, Nebraska-based company said yesterday in a statement. Operating earnings, which exclude some investment results, were $2,228 a share, missing the $2,403 average estimate of three analysts surveyed by Bloomberg.

Berkshire has benefited from an expanding U.S. economy and stands to make further gains as consumer demand picks up and the housing market recovers. The company’s subsidiaries haul freight, insure cars, generate electricity, make building supplies and sell products from running shoes to diamond rings.

Acquisitions (BRK/A) and investments have positioned Berkshire to be “an all-in bet on the U.S.,” said Bill Smead, chief executive officer of Smead Capital Management, which oversees about $680 million including shares of Buffett’s company. “There’s a lot of earnings leverage.”

Class B shares slipped 0.2 percent to $114.99 at 7:56 p.m. in New York after the results were released. They had rallied 29 percent this year through yesterday’s close, compared with the 24 percent advance in the Standard & Poor’s 500 Index.

Photographer: Scott Eells/Bloomberg

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc. Close

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc.

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Photographer: Scott Eells/Bloomberg

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc.

Gains on investments, including bets on Goldman Sachs Group Inc. (GS), General Electric Co. and Wm. Wrigley Jr. Co., added $1.86 billion to earnings before tax, compared with $917 million a year earlier. Berkshire posted a $427 million gain on derivatives in the quarter, compared with a $118 million loss a year earlier. Buffett, 83, uses the contracts to wager on stock markets and the creditworthiness of borrowers.

Buffett’s Warrants

Buffett, Berkshire’s chairman and CEO, exchanged warrants in Goldman Sachs and GE after the quarter for common stock. Both deals stem from investments made during the 2008 financial crisis. Berkshire booked a profit of $680 million as Mars Inc. agreed to pay a premium to repurchase bonds that Buffett bought to help the candy company acquire Wrigley.

BNSF contributed $989 million to earnings, compared with $937 million a year earlier. Utility unit MidAmerican Energy Holdings Co. added $472 million, up from $438 million.

Earnings from manufacturing, service and retailing units increased to $1.16 billion in the three months ended Sept. 30 from $991 million in the same period in 2012.

The U.S. economy probably expanded at a 1.9 percent annualized rate in the third quarter, according to the average estimate in a Bloomberg survey. That’s slower than the 2.5 percent pace in the three months ended June 30.

Housing Market

The housing market rebound cooled in July and August. Buffett said last week that the U.S. economy is making progress and that residential real estate still has a way to go in recovering.

“It’s coming back,” he said at an Oct. 23 event at the New York Public Library. “Pricing is better in almost all markets by a reasonable percentage from a few years ago.”

Berkshire’s book value, a measure of assets minus liabilities that Buffett uses to gauge his performance, rose in the quarter to $126,766 per Class A share from $122,900 at the end of June. Class A shares closed yesterday at $173,123 in New York. Each one can be converted into 1,500 Class B shares.

The cash pile climbed to $42.1 billion at the end of September from $35.7 billion three months earlier. Buffett spent more than $12 billion in the second quarter in a deal that took ketchup maker HJ Heinz Co. private.

Insurance Results

Underwriting profit at insurance units declined 57 percent to $170 million as the frequency and severity of claims increased at Geico. The loss widened at the reinsurance unit run by Ajit Jain and hailstorms in Europe pressured results at the General Re business.

Investment income from insurance operations added $861 million to the company’s profit, compared with $733 million in last year’s third quarter.

Berkshire’s stock portfolio was valued at $106.8 billion on Sept. 30, up from $103.3 billion at the end of June. Buffett and his deputies spent $1.16 billion on fixed-maturity securities and $1.77 billion on equities in the quarter.

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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