October 23, 2021

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Berkshire Hathaway profits rise on back of economic recovery

Berkshire Hathaway Inc updates

Warren Buffett’s Berkshire Hathaway reported a 7 per cent increase in profits in the second quarter, with many of the companies owned by the sprawling conglomerate benefiting from the economic recovery.

The investment company disclosed on Saturday that it had earned $28.1bn, or $18,488 per class A share, in the three months to the end of June.

Operating earnings, which strip out the swings in value of Berkshire’s investments and which Buffett uses as a preferred gauge of the company’s business performance, rose 21 per cent from a year prior to $6.7bn.

The results were rosy almost across the board at Berkshire businesses, with a 34 per cent jump in profits at its BNSF railroad and a 40 per cent rise in pre-tax earnings from its division that builds homes and manufacturers parts for new constructions.

The company noted that results at some of its businesses were “exceeding pre-pandemic levels,” even as it struggled with supply chain disruptions and higher inflation, issues that have hit small and large companies alike.

Line chart of Performance (%) showing Berkshire may be ahead in 2021, but still lags since the crisis began

A note of the “significant” recovery Berkshire said it was seeing, as well as its management’s team’s optimism, could also be gleaned from the fact the company no longer said its “businesses continue to suffer adverse effects from the pandemic” as it did in the previous quarter.

The strong results offset an expected weaker showing from the company’s mammoth stock portfolio.

The improvement at Berkshire mirrored a recovery under way at the vast majority of companies in corporate America, as the country rebounds from the worst of the economic devastation seen at the nadir of the crisis.

Profits at S&P 500 companies rose 93 per cent in the second quarter from year-ago levels, according to data provider Refinitiv, with many businesses hurdling Wall Street expectations as consumer and industrial demand has rebounded.

Berkshire’s closely watched cash-pile slipped to $144bn, down $1.4bn from the year prior. The company also remained a net seller of stock in the quarter, according to its financial disclosures, and has been restrained on the acquisition front. James Shanahan, an analyst with Edward Jones, estimates that Berkshire has sold $13.6bn more in stock than it has purchased since early 2020.

The value of its equity portfolio nonetheless rose to $308bn at the end of June.

Column chart of Cash and cash equivalents ($bn) showing Berkshire's cash pile slipped but remained near its record high

It spent $6bn in the quarter buying back its own stock, slightly less than the $6.6bn it used in the first three months of the year to repurchase shares.

The near record cash pile may dishearten some longtime investors who had hoped the so-called Oracle of Omaha would find the kind of investment opportunities that had made Berkshire both a household name and a must-own stock.

“Investors will likely applaud share buybacks in the quarter . . . but are also likely to remain focused on Berkshire’s $100bn-plus in cash and the potential acquisitions that could be made with those assets,” said Cathy Seifert, an analyst at CFRA who covers Berkshire.

The company’s quarterly results are often analysed by investors across the globe for insights into how the economic tide is shifting, given Berkshire owns a panoply of unrelated ventures. And the figures in its quarterly filing with securities regulators showed just how much hard-hit parts of the economy have recovered.

Revenues at Berkshire’s TTI, which distributes electronic components, jumped more than 50 per cent as demand for chips and other manufactured goods boomed. NetJets, the fractional jet-ownership company, the Marmon industrial unit and Berkshire’s automotive sales business also reported a strong uptick in demand.

Its chemicals business Lubrizol said it saw a double-digit increase in sales. But profits sank as it paid $160m in the quarter to cover the costs of a June fire at an Illinois facility.

Geico, the insurer that is among Berkshire’s crown jewels, was among the few weak points. Pre-tax profits fell 70 per cent from the year prior as more Americans returned to the open road, resulting in a rise in insurance claims.

Class A shares of the company have climbed 24 per cent this year, outpacing the 18 per cent rise by the benchmark S&P 500.

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