Berkshire Hathaway Inc. (BRK.A)(BRK.B) reported its third quarter 2011 operating earnings of $1.54 per share, which marks an increase of 36% year-over-year. The strong growth in earnings was led by higher operating income across all the business segments, except Finance & Financial Products.
However, net income (a GAAP measure) came in at 92 cents per share, down 23% year over year. The decline in net income was attributable to a loss of $1.5 billion in investment and derivatives caused by weak equity markets, as against gains of $0.2 billion in the year-ago quarter.
Total revenue declined 7.2% year over year to $33.7 billion, primarily due to derivative losses of $2.4 billion along with lower revenue from its Insurance segment, partially offset by higher revenue from Railroad, Utilities and Energy business.
Segment Results
The Insurance Group segment reported revenue of $8.7 billion, down 16% year over year led by a decline of 16% in net premium earned and 15% lower net investment income. The segment reported net insurance underwriting profit of $1.7 billion, up 80% from $305 billion reported in the prior year quarter, led primarily by Berkshire Hathaway Reinsurance Group which reported large gain of $1.38 billion compared with a loss of $237 million last year. The company's insurance investment income was down 10% year over year to $1.03 billion as a result of the drop in the value of the company's derivatives.
The Railroad, Utilities and Energy segment’s total revenue increased 8.5% year over year to $7.8 billion. Of the total segment’s revenue, 64% came from Burlington Northern Santa Fe, the railroad company, which was acquired in February 2010.
Rail demand is bouncing back with an increase in industrial and agricultural activity as well as reviving consumer demand, a trend that is expected to continue. However, revenue from MidAmerican which comprises other businesses of the segment saw a modest revenue increase of 1.5% year over year.
Total revenue of the Manufacturing, Service and Retailing segment climbed up 6.9% year over year to $18.5 billion, led by an increase in all the sub-businesses. Marmon’s revenue improved 18%, Mc Lane’s revenue increased 1.1% and other manufacturing which includes a wide array of businesses saw an increase of 15% in revenue.
The Finance & Financial Products segment’s total revenue declined 5% year over year to $995 million, led by a 6% drop in revenue from the manufactured housing business, Clayton Homes, which continues to be adversely affected by the soft housing market and the surplus of traditional single-family homes for sale. However, the drop was partly mitigated by a 9% increase in revenues from furniture/transportation equipment leasing segment.
Omaha-based Berkshire continues to grow its balance sheet. Consolidated shareholders’ equity or net worth, as of September was $163.8 billion, up 0.6% from December 31, 2011.
Book value, a measure of assets minus liabilities, fell 1.9% sequentially to $64.5 per share as of September 30, 2011.
Berkshire ended the quarter with $34.78 billion of cash in hand, down from $47.89 billion at the end of June 30, 2011. During the quarter, Berkshire funded the purchase of chemical maker Lubrizol for $9 billion and invested $5 billion in Bank of America Corp. (BAC).
The company made its first ever share buyback announcement during the quarter to deploy excess capital. Following the announcement, Berkshire repurchased 15 Class A shares at an average price of about $107,462 during the period of September 26 to September 30. It bought back 227,669 Class B shares at an average price of $71.45. In total, the company spent about $17.9 million during the period.
Berkshire is a conglomerate which houses over 70 different businesses, along with equity investments in many companies. The company has seen its earnings swing from quarter to quarter due to heavy exposure to stock option derivatives. However, most of these gains/losses are unrealized.
Other than the derivatives related earnings fluctuation, looking closely, we see that most of the Berkshire’s businesses – Insurance, Railroad, Utilities and Energy, Manufacturing, Service and Retailing have performed well year-till-date.
However, we expect its Finance and Financial products segment to remain somewhat weak given ongoing soft housing markets and the surplus of traditional single family homes for sale which will continue to negatively affect the results.
We maintain our Neutral recommendation on the shares of Berkshire Hathaway. The stock also retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
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