Berkshire Profit Advances 72% on Buffett’s Derivatives, Railroad

Monday, 05 Nov 2012 09:55 AM

 

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Warren Buffett’s Berkshire Hathaway Inc. said profit climbed 72 percent in the third quarter on better results from its derivatives book and higher earnings at railroad Burlington Northern Santa Fe.

Net income rose to $3.92 billion, or $2,373 a share, from $2.28 billion, or $1,380, a year earlier, the Omaha, Nebraska- based company said 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 Friday. The company has advanced 14 percent this year, compared with the 12 percent gain in the Standard & Poor’s 500 Index.

Book Value

Book value, a measure of assets minus liabilities, climbed 15 percent to $111,718 a share from a year earlier, the biggest gain since 2010. Buffett highlights the metric on the first page of his annual report and has said that it’s the best available indicator of the company’s intrinsic value.

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 completed his biggest takeover, Burlington Northern, in 2010 in a $26.5 billion transaction. The business contributed $937 million to earnings, compared with $766 million a year earlier on an increase in the volume of shipped consumer products, coal and agricultural goods.

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 without disclosing terms.

Berkshire’s Cash

Berkshire’s cash pile rose to $47.8 billion from $40.7 billion three months earlier.

Buffett and his deputies purchased $1.18 billion in equities and $2.08 billion on bonds in the quarter, and sold $3.18 billion in stocks and $1.2 billion in fixed-maturity securities.

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. 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 & Co. gained 3.3 percent in the third quarter and IBM advanced 6.1 percent.

MidAmerican Energy

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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