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Berkshire Hathaway Earnings: Fourth Quarter 2010
Over the weekend, holding company Berkshire Hathaway (BRKB) released excellent financial results for the December quarter. Revenues were 20% higher, year over year, while share earnings came in at $1.77, besting our $1.13 estimate and exceeding the year-earlier tally by 35%. The healthy result capped off a very solid year for legendary investor Warren Buffett's company.
Last February, the company completed the purchase of Burlington Northern Santa Fe. The railroad operates about 32,000 miles of track connecting the Midwest, the Pacific Northwest, Canada, and the Gulf of Mexico. It derives the bulk of its revenues from transporting consumer goods, industrial products, coal, and agricultural products. Although Burlington’s bottom line was hampered during the recession, the ongoing economic rebound has helped it post good results while a member of Buffett's stable. During 2010, Berkshire Hathaway's Railroads, Utilities and Energy division, which includes Burlington and some electric utility businesses, posted revenues of $26.4 billion, more than double 2009's total. The bulk of the increase stemmed from the addition of Burlington and, in our view, the railroad will continue to be a lucrative property during the economic recovery and beyond. Burlington also helped further diversify Berkshire’s holdings.
Berkshire's bread and butter, its vast insurance holdings, thrived during 2010, as well. These businesses, headlined by automobile insurer GEICO, achieved an underwriting profit of more than $2 billion last year, up from $1.5 billion in 2009. Premiums earned also increased more than 10%. In addition, when Berkshire sells its insurance policies to individuals, businesses, municipalities, and other entities, it receives premiums upfront and pays claims, if necessary, down the road. Thus, the insurance operations allow Berkshire, at any one time, to hold huge sums of money, which is referred to as the float. Buffett can then invest the float, which has historically led to handsome profits. For comparison purposes, in 1970, Berkshire's float amounted to $39 million. At the end of 2010, that figure exceeded $65 billion, and the interest and capital gains that the company earns is, for the most part, free. During 2010, due to its immense equity portfolio (funded mostly by the float), where we find huge holdings of Coca-Cola (KO - Free Coca-Cola Stock Report), American Express (AXP - Free American Express Stock Report), and Wells Fargo (WFC), among others, Berkshire earned more than $13.7 billion in investment income. A strong stock market rise during the course of the year, along with many companies increasing their dividend payouts, helped immensely in this regard.
All told, Berkshire Hathaway was firing on all cylinders during 2010. For the year, share earnings came in at $5.29, 53% higher than 2009's tally. The stock also performed well, increasing 21% during the course of 2010. Looking ahead, we believe that the company will continue to do well. Berkshire’s current roster of businesses will likely post healthy profit increases in the years ahead and, with its large cash reserves, Mr. Buffett ought to remain active on the acquisition front.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.