Warren Buffett’s Berkshire Hathaway saw its earnings and operating profit rise 25% in the second quarter, thanks to a combination of the positive impact of investment gains and acquisitions which offset weak returns from its big railway unit and some parts of its manufacturing arm.
Berkshire Hathaway told the market after trading that the improved result came from higher returns from its huge insurance underwriting business, investment gains and the initial contribution from the $US32.7 billion purchase, Precision Castparts Corp.
But the result missed market forecasts as weak coal and oil prices again hit Berkshire’s Burlington Northern and Santa Fe (BNSF) railroad business. Its revenues fell 15% and pre-tax profits slid 19% $US1.2 billion.
BNSF operates approximately 32,500 route miles of track in 28 US states and three Canadian provinces and has expanded its coal and oil carrying business in recent years by investing billions in new fright cars and engines, only to find demand for both oil and coal slumped as prices fell sharply.
Coal revenues fell 41% and interestingly, general freight revenues fell 5% as exports were clipped by the stronger dollar and weaker global demand.
US oil producers are increasingly transporting oil by pipeline rather than rail and Berkshire warned on Friday night that. “With oil at low production levels, along with pipeline displacement, we expect comparative volume declines in petroleum-related categories for the remainder of 2016.”
Berkshire said net income for the quarter rose to $US5 billion, from $US4.01 billion, in the second quarter of 2015. For the six months to June, net income jumped to $US10.590 billion from $US9.177 billion.
Operating profit for the quarter rose 18% to $US4.61 billion, from $US3.89 billion.
Revenue rose 6% to $US54.46 billion. Book value per share, Buffett’s preferred measure of growth, edged up 1.7% from the end of March to $US160,009, compared to the 1.9% rise for the S&P 500, which is also Buffett’s preferred target. For the half year to June the cash value per share rose 2.9% against a 2.4% rise a year ago. The S&P 500 rose 3.49% in the first half of this year.
The company’s huge insurance underwriting business swung heavily to a $US337 million profit in the quarter, compared to the loss of $US38 in the same quarter of 2015. That boosted the company’s overall insurance profit, including investments, 40% to $US1.32 billion.
Berkshire Hathaway’s reinsurance business returned to profit and the Geico car insurance business lifted profit from $US53 million a year ago to $US150 million
Helping was the company’s most exotic insurance business – the selling of insurance cover against major catastrophes (so-called Cat Insurance). It posted a $US184 million pretax underwriting gain, against the loss of $US11 million in the same quarter of last year.
Profit at Berkshire Hathaway Energy (its power utility and gas pipeline arm), fell to $US482 million from $US502 million a year earlier.
Precision Castparts helped boost pretax profit in Berkshire’s huge industrial products sector by 34%. The June quarter was Precision’s first full quarter as a Berkshire business. Manufacturing earnings rose to more than $US1.687 billion from $1.393 billion a year ago.
But other parts of the manufacturing businesses were hit by weak demand in the quarter and half year and the company warned that “we may take additional cost containment actions in response to further slowdowns in customer demand.” Investments and derivatives saw a sharp improvement in profit to a reported $US394 million more than three times the $US123 million a year earlier.
Berkshire ended the quarter with more cash, $US72.68 billion, than it had beforehand. The float in the insurance business jumped to more than $US90 billion.
A key reason for the cash boost was that Kraft Heinz Co, in which Berkshire holds a 26.8% stake stake, redeemed $US8.32 billion of preferred stock that Berkshire also owned. Berkshire made a $US610 million gain on this transaction.
But not everything Buffett and his companies touch turns to gold. Berkshire’s accounts said near the end of the notes section:
"As of June 30, 2016, gross unrealized losses on our investments in equity and fixed maturity securities determined on an individual purchase lot basis were approximately $2.4 billion, of which approximately $1.5 billion pertained to our investment in IBM common stock. We concluded that as of that date, such losses were temporary. We consider several factors in determining whether or not impairments are deemed to be other than temporary, including the current and expected long-term business prospects and if applicable, the creditworthiness of the issuer, our ability and intent to hold the investment until the price recovers and the length of time and relative magnitude of the price decline.”
IBM is one the Buffett’s four core stockmarket investments (Coca Cola, Wells Fargo and American Express are the other three).
Berkshire’s stock portfolio was valued at $US104.2 billion at the end of the June quarter, down from $US106.4 billion on March 31. Some of Buffett’s biggest holdings – including Wells Fargo, American Express and Phillips 66 – fell in the quarter.
