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Berkshire Hathaway Earnings: First Quarter 2011
Holding company Berkshire Hathaway (BRK/B) has released lackluster results for the March quarter. Although revenues increased more than 5% year over year, the tragic natural disasters in Japan, coupled with a series of catastrophes in Australia and New Zealand, caused the company's insurance underwriting business to incur large losses. All told, share net was $0.61 in the term, well shy of our estimate of $1.20 and the $1.51 earned in the year-earlier period. Along with weak results in the insurance underwriting operation, several of Berkshire's subsidiaries that provide construction materials continued to struggle, since the U.S. housing market remains soft.
However, it wasn't all bad news for Berkshire, with a number of its businesses performing well during the first quarter. Notably, the Railroad, Utilities and Energy segment achieved a hefty top-line gain (47% year over year), helped by last year's acquisition of Burlington Northern Santa Fe. Northern Sante Fe operates about 32,000 miles of track connecting the Midwest, the Pacific Northwest, Canada, and the Gulf of Mexico, and derives the bulk of its revenues from transporting consumer goods, industrial products, coal, and agricultural products. The ongoing economic expansion has helped it post excellent results of late, a trend that ought to persist for many years.
Meanwhile, Berkshire's most well known insurance business, GEICO, also performed well. The auto insurer continued to pick up market share, benefiting from a huge advertising budget, as well as the ability to offer lower car insurance rates than some of the competition. In the March quarter, GEICO's premiums earned advanced more than 6% and its underwriting gain increased 13%, to $337 million. GEICO's near- and long-term prospects remain solid.
Looking ahead, losses stemming from the grim situation in Japan will likely spill over into the current quarter. Thus, we have materially reduced our full-year share-net estimate to $4.00, 20% lower than our previous call and 24% below 2010's tally.
Despite the short-term weakness, we still think this stock should interest buy-and-hold investors. Berkshire owns dozens of profitable businesses that ought to perform well over the next several years. In addition, it's currently in the process of acquiring Lubrizol, a producer of chemicals for pharmaceuticals companies, fuel additives for gasoline and diesel, and other ingredients for the transportation industry. We continue to like this deal for Berkshire, since Lubrizol remains a market leader for several applications and generates healthy earnings and cash flow. In fact, Lubrizol has posted a bottom-line gain every year since 2003. Under terms of the deal, Berkshire would pay $135 in cash for each share of Lubrizol. In addition to this transaction, we believe that Chairman and CEO Warren Buffett will remain aggressive in seeking out acquisitions, which ought to be accretive to results to 2014-2016.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.