Berkshire Profit Surges to Record $9.43 Billion on Kraft Heinz

Warren Buffett's Hits and Misses
  • Operating profit beats estimates as railroad earnings rise
  • Unrealized losses on IBM stake widen to $2 billion in quarter

Warren Buffett’s Berkshire Hathaway Inc. said third-quarter profit doubled on a one-time investment gain in Kraft Heinz Co. 

Net income climbed to a record $9.43 billion, or $5,737 a share, from $4.62 billion, or $2,811, a year earlier, the Omaha, Nebraska-based company said in a statement Friday. Operating earnings, which exclude some investment results, were $2,769 a share, beating the $2,721 average estimate of three analysts surveyed by Bloomberg. 

The results show how lucrative Berkshire’s relationship has been with 3G Capital. Buffett, 85, teamed with the investment firm in 2013 to buy ketchup maker H.J. Heinz and embarked on an aggressive cost-cutting drive to boost margins. Then, in March, they engineered Heinz’s purchase of Kraft Foods Group Inc., creating the third-biggest food and beverage company in North America and a $4.4 billion windfall for Berkshire. 

“It shows shrewd investing on his part,” James Armstrong, who oversees about $550 million including shares of Berkshire as president of Henry H. Armstrong Associates, said before the earnings announcement. “The old guy still has some smarts upstairs.”

Book value, a measure of assets minus liabilities, rose almost 1 percent from June 30 to $151,083 a share.

IBM Slump

The bet on Kraft Heinz overshadowed some of the challenges Buffett has faced this year in his stock portfolio. A few of his largest holdings -- including American Express Co. and International Business Machines Corp. -- have tumbled since Dec. 31. 

Berkshire said in a regulatory filing Friday that unrealized losses on IBM widened to $2 billion as of Sept. 30, or about 15 percent of what Buffett paid. The billionaire stuck by the investment, saying he has no plan to exit the stake and expects shares to recover.

“He’s put a lot of capital to work in these two investments and they’ve underperformed,” Jim Shanahan, an analyst at Edward Jones & Co., said in a phone interview of IBM and AmEx. “You have to wonder if he held onto these investments too long.”

Berkshire’s own shares have slumped 10 percent this year, lagging behind the 2 percent gain for the Standard & Poor’s 500 Index. The last time Buffett fell short of the benchmark, including dividends, for a full year was 2011.

Railroad, Insurance

Shanahan said he was impressed, however, by results at the railroad and signs of a recovery at insurance units. Underwriting profit at the insurance segment was $414 million. While that’s down from last year’s third quarter, it’s an improvement from a loss in the second quarter.

The pretax gain at the Geico unit, which sells auto coverage, slipped about 2 percent from last year’s third quarter to $258 million. Profit from reinsurance operations tumbled as the company had about $130 million in costs tied to an explosion at the port of Tianjin, China.

The railroad, BNSF, contributed $1.16 billion to quarterly earnings, compared with $1.04 billion a year earlier. Fuel costs fell, and freight revenue climbed from agricultural products.

Profit at the utility business, renamed Berkshire Hathaway Energy last year, rose 13 percent to $786 million. The unit added an electric transmission business in Canada late last year.

Trucking, Underwear

Earnings from manufacturing, service and retailing units decreased to $1.18 billion in the third quarter from $1.22 billion in the same period in 2014. The group of businesses includes chemical company Lubrizol; McLane, a trucking operation; and Fruit of the Loom, which makes underwear and other clothing. Berkshire doesn’t break down results for each business in the segment.

Buffett, Berkshire’s chairman, chief executive officer and largest shareholder, continues to add to his stable of businesses. In August, he agreed to purchase Precision Castparts Corp. for about $32 billion. The company makes complex metal parts for the aerospace industry and will be among the largest businesses at Berkshire when the takeover is completed next year.

The deal will probably keep Berkshire from doing another major acquisition for about a year, Buffett has said. The company plans to pay for about two-thirds of the transaction in cash, depleting the $66.3 billion it held at the end of September.

Derivative Bets

Berkshire’s equity portfolio was valued at $110.3 billion on Sept. 30, down from $117.7 billion at the end of June. The global stock slump also hurt Buffett’s derivatives contracts, which posted a $764 million pretax loss, compared with profit of $258 million in last year’s third quarter.

Buffett and his deputy investment managers spent $4.1 billion on equities and $2.36 billion on fixed-maturity securities in the quarter. They sold $3.6 billion in stock and $169 million of bonds during the period.

The previous record for net income in a quarter was $6.4 billion in the three months ended June 2014, which was also driven by a one-time investment result. In that period, Berkshire recorded a gain tied to the exit of most of its stake in the former publisher of the Washington Post.

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