The recent news surrounding Berkshire Hathaway (BRK.B)
hasn’t been good, tarnishing its CEO, the legendary Warren Buffett. David Sokol, Buffett’s heir apparent, abruptly quit in March. That’s when the company revealed Sokol had bought shares in Lubrizol before Berkshire made a bid for it and then took home $3 million in profit afterward.
In April, Berkshire said an internal investigation showed Sokol violated corporate ethics policy. The incident is obviously bad publicity for Berkshire and Buffett. It shows he may be too lax in supervising his underlings, though he can hardly be expected to keep close tabs on all of them.
In any case, the scandal has little to do with the company’s performance. Berkshire owns about 80 businesses, and most of them are doing quite well. It has offered investors an annualized return of 20 percent on book value since its founding in 1965.
While the company’s preliminary first-quarter profit slumped to $1.51 billion from $3.63 billion a year earlier, much of that decline stems from insurance losses on Japan’s earthquake, which will be temporary.
Nevertheless, Berkshire’s profit soared 43 percent in the fourth quarter to $4.38 billion from $3.1 billion a year earlier. Revenue jumped 20 percent to $36.2 million.
Burlington Northern Santa Fe, the railroad Berkshire bought last year, helped power the performance, as did a gain in the value of its derivative contracts and investments.
Betting on recovery
Buffett himself acknowledges that Berkshire’s mammoth size will limit gains. The value of its stock investments, bonds, and cash totals $158 billion. But you can still expect steady returns.
Buffett says he’s looking for more big acquisitions to fuel earnings growth.
Succession is a major issue, with Buffett now 80. But Sokol aside, Buffett has a pretty good track record of choosing management talent.
Many experts see a bright future for the company. “Going forward, we are bullish on Berkshire’s prospects,” write analysts at Zacks Investment Research. “As the economic situation improves and consumer confidence revives, along with spending, we expect the company to benefit from each of its segments.”
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