Strategy

Berkshire Hathaway Reports Mixed Earnings

While operating profit got a boost from manufacturing and other businesses, net income fell on lower investment gains.
Matthew HellerNovember 8, 2016
Berkshire Hathaway Reports Mixed Earnings

Berkshire Hathaway’s operating profit from its businesses rose 6.6% in the third quarter but net income fell due to lower investment gains.

Warren Buffett’s conglomerate had operating earnings of $4.85 billion, amounting to $1.97 per Class B share or $2,951 per Class A share, in the three months that ended Sept. 30, compared to $4.55 billion a year earlier.

The increase was fueled by revenue and pre-tax profits from Berkshire companies in manufacturing, utilities and energy. Pre-tax earnings from manufacturing businesses jumped to about $2 billion, up from $1.3 billion a year ago.

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But Berkshire also reported that net income, which includes investments and derivatives, totaled $7.2 billion, or $2.92 per share of Class B stock, down 23.7% from the third quarter of 2015. The year-ago results benefited from a $4.4 billion gain on Berkshire’s investment in Kraft Heinz.

Berkshire’s “plain vanilla” portfolio made up primarily of publicly traded stocks contributed $2 billion to earnings, while its derivatives positions contributed $297 million. In the same period last year, its investment portfolio generated $4.9 billion in earnings.

“Although net income is the standard measure of corporate performance, Buffett has said Berkshire’s operating earnings are a better gauge because net income is affected by swings in the paper value of its insurance-like derivatives and by investment gains and losses taken during the reporting period,” the Omaha Herald noted.

Operating profit from Berkshire’s insurance businesses improved to $850 million, while operating profit at the railroad, utilities and energy segments held near flat at $1.95 billion. Burlington Northern Santa Fe, Berkshire’s railroad, reported a 12% decline from the year-ago period as a sluggish energy market continued to weigh on freight volume and prices.

“The biggest drag on earnings is [the effort in] turning the railroad around,” Bill Smead, chief executive of Smead Capital Management, a Berkshire shareholder, told The Wall Street Journal.

Analysts surveyed by FactSet had predicted Berkshire’s third-quarter operating income at $2.02 per Class B share or $3,030 per Class A share.