Buffett's derivatives bets pay off

Berkshire's second-quarter profit climbs 45 percent

Aug 3, 2013 @ 8:42 am (Updated 8:55 am) EST

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Photo: Bloomberg News

Berkshire Hathaway Inc. (BRK/A) said second-quarter profit climbed 46 percent on Chairman Warren Buffett's derivative bets and gains at the company's railroad.

Net income rose to $4.54 billion, or $2,763 a share, from $3.11 billion, or $1,882, a year earlier, the Omaha, Nebraska-based company said today in a regulatory filing. Operating earnings, which exclude some investment results, were $2,384 a share, beating the $2,166 average estimate of three analysts surveyed by Bloomberg.

Berkshire has benefited this year as the U.S. economy rebounded and stocks rallied, boosting the value of Buffett's investments. The company's operating businesses, including railroad Burlington Northern Santa Fe, auto insurer Geico and utility MidAmerican Energy Holdings Co., do most of their business in the world's largest economy.

“As America goes, so goes Berkshire,” Meyer Shields, an analyst at Keefe, Bruyette & Woods, said in a phone interview before results were announced.

Class A shares rose 0.5 percent to $176,500 at 4 p.m. today in New York prior to the release, extending their advance to 32 percent this year. That compares with the 20 percent rise in the Standard & Poor's 500 Index.

Buffett's derivative bets on stock market gains boosted earnings by $390 million in the second quarter, compared with a loss of $1.17 billion a year earlier. Fluctuations in the value of the contracts are recorded in net income each quarter, even though the wagers won't be settled until 2018 or later.

Railroad, Utilities

Net income from BNSF, Buffett's biggest acquisition, climbed 10 percent from a year earlier to $884 million. MidAmerican added $279 million to Berkshire's profit compared with $253 million in last year's second quarter on higher earnings at utility PacifiCorp and real-estate broker HomeServices of America.

Book value, a measure of assets minus liabilities, rose to about $122,900 a share on June 30 from $120,525 on March 31.

Buffett, 82, and his deputies have been expanding Berkshire this year through acquisitions. MidAmerican Chief Executive Officer Greg Abel agreed in May to buy a Nevada utility for $5.6 billion.

Berkshire and Jorge Paulo Lemann's 3G Capital completed their purchase in June of HJ Heinz Co., with Buffett's company investing more than $12 billion for a preferred stake and half the common stock, or 425 million shares. Berkshire also has warrants to buy 46 million additional Heinz shares for 1 cent each, today's filing showed.

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Those deals, along with spending on plant and equipment at BNSF and other units, are helping Berkshire deploy cash that accumulates at a rate of about $1 billion a month. Buffett's firm spent $4.64 billion on stocks in the quarter, while selling $781 million, according to the filing. Most of the increase was in the category that Berkshire labels as “commercial, industrial and other.”

The company's stock portfolio was valued at $103.3 billion on June 30, up from $97.2 billion at the end of March. The cash pile fell 27 percent in three months to $35.7 billion on June 30 after the Heinz deal.

The insurance segment's underwriting profit slipped 14 percent from last year's second quarter to $530 million as flooding in Europe boosted General Re's claims. Geico's underwriting profit was $336 million before tax. Insurance investment income rose about 7 percent to $1.14 billion.

Manufacturing, Retailing

Earnings from manufacturing, service and retailing units increased to $1.07 billion in the second quarter from $1.03 billion in the same period in 2012. The group of businesses includes engine-additive maker Lubrizol; Marmon Holdings, a manufacturer of construction materials; and Fruit of the Loom, which produces underwear and other clothing. Berkshire doesn't break down results by each business.

In the past 15 years, Buffett shifted the company toward more capital-intensive industries, purchasing MidAmerican, the railroad and manufacturing companies. Those bets have tethered its results more to the U.S. economy and the housing market.

Among Berkshire's operating units are paintmaker Benjamin Moore; Clayton Homes, a builder of manufactured housing; and HomeServices. Buffett's firm is also the largest shareholder in Wells Fargo & Co. (WFC), the biggest U.S. mortgage lender.

Historically low borrowing costs, short supply and an improving job market are boosting demand for residential real estate. U.S. home prices rose in May by 12.2 percent from a year earlier, the biggest 12-month gain since 2006, according to the S&P/Case-Shiller index of property values in 20 cities.

Gains in housing have helped propel a rebound in the U.S. economy. Gross domestic product rose at a 1.7 percent annualized rate in the second quarter, after a 1.1 percent gain in the first three months of the year, Commerce Department figures showed this week.

(Bloomberg News)