Berkshire Hathaway Insurance & Energy Units Drive Growth

On Nov 19, we issued an updated research report on Berkshire Hathaway Inc. (BRK.A) (BRK.B). The company reported third-quarter operating earnings of $1.91 per share, way ahead of the Zacks Consensus Estimate of $1.70. Earnings also compared favorably with $1.49 per share reported in the year-ago quarter.

Earnings growth came primarily from the insurance business which benefited from higher underwriting income thanks to the absence of catastrophic claims and from the energy business, which benefited from last year’s acquisition of NV Energy in Nevada. Other segments at Manufacturing, Service and Retailing and Finance and Financial products also contributed to earnings growth albeit at a lesser degree.

Though Berkshire Hathaway is a conglomerate, housing a number of businesses, its property and casualty insurance business has been the engine behind its growth. The segment has successfully released huge moat (investible surplus), making numerous acquisitions possible for the company. This strength differentiates Berkshire’s insurance companies from its competitors.

Berkshire’s economically sensitive non-insurance businesses – utilities and energy, and manufacturing, service and retail – are performing well and are expected to continue doing so with the economy improving. The utilities and energy business is witnessing substantial growth led by increased revenues from BNSF, the railway which was acquired in Feb 2010. The NV Energy acquisition also added fuel for further growth of the business.

Berkshire’s Finance and Financial Products segment is also performing well after suffering from a soft housing market in the recent past. We expect improving trends in this business segment given that the housing market is back on track.

Moreover, with Warren Buffett at the helm, the company has created tremendous value for its shareholders over the past several years. A strong capital position along with his unique skills in making the right acquisitions has made Berkshire a conglomerate with equity stake in many big companies.

Rank & Other Stocks

Berkshire Hathaway holds a Zacks Rank #2 (Buy). Other players worth considering include Arch Capital Group Ltd. (ACGL), AmTrust Financial Services, Inc. (AFSI) and Atlas Financial Holdings, Inc. (AFH). All these stocks sport a Zacks Rank #1 (Strong Buy).