Warren Buffett’s Berkshire Hathaway posts sharp rise in profits
Omaha conglomerate bought back $928m of shares in third quarter
Warren Buffett’s Berkshire Hathaway repurchased $928m of its stock in the third quarter, a telling shift by the company, that underscores the difficulty its chief executive has had finding attractive deals that fit his investment philosophy.
The move comes months after Berkshire gave Mr Buffett and vice chairman Charlie Munger more leeway in their ability to buy back shares, as its multibillion-dollar cash pile sits idle.
Mr Buffett has lamented an acquisition frenzy over the past two years, a frenzy that Berkshire has largely sat out.
The sprawling conglomerate, which owns the Geico insurer, BNSF railroad and NetJets private jets businesses, last clinched a major acquisition in 2016 when it purchased aircraft parts maker Precision Castparts for $37bn, including debt.
Since then, investors have been left waiting for its next big takeover. Berkshire and Brazilian private equity group 3G Capital last year failed to secure a $143bn agreement to combine consumer goods giant Unilever with Kraft Heinz. Only months later, Berkshire saw its multibillion-dollar bid for a unit of Texas utility Energy Future Holdings rejected.
In his most recent annual letter to shareholders, Mr Buffett said that sensible purchase prices remained the key barrier to nearly every deal the company had reviewed in 2017 and likened Berkshire’s dealmaking restraint to a drought.
During that drought, the company’s cash levels have climbed to roughly $104bn. Another measure of the group’s dealmaking firepower, so-called float — insurance premiums the company has collected before it has settled claims — rose $2bn from midyear to stand at $118bn at the end of September.
Investors will now watch to see if share repurchases become more frequent, as Mr Buffett has promised to stick by his longstanding principles when buying up companies.
“We will stick with our simple guideline: The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own,” Mr Buffett wrote in February.
As the third quarter demonstrated, Berkshire’s core businesses continue to throw off cash. Earnings and revenues climbed across the $509bn conglomerate, with BNSF benefiting from a strong US economy and a lower tax rate. Overall, operating earnings from the wide variety of businesses that Berkshire owns nearly doubled from a year earlier to $6.9bn, or roughly $4,186 per share. Analysts had expected the company to report operating earnings of $3,827 per share.
Net profits surged even higher, rising more than fourfold from a year earlier to $18.54bn, or $11,280 per class A share, for the three months to the end of September. That compared to the $2,473 per share in earnings Berkshire generated a year ago and easily hurdled expectations on Wall Street.
Berkshire attributed nearly $12bn of its net profit gains in the quarter to moves in the value of its mammoth investment portfolio, which includes stakes in companies like Apple, Coca-Cola, General Motors, American Express, Bank of America and Wells Fargo. Changes in accounting rules now require Berkshire to include the fluctuations in its multibillion-dollar stock portfolio alongside its quarterly results, a decision that the company has lambasted.
“The amount of investment gains [or] losses in any given quarter is usually meaningless and delivers figures for net earnings per share that can be misleading to investors who have little or no knowledge of accounting rules,” the company said.
Those third quarter gains may prove fleeting. The rise in shares earlier this year, with the S&P 500 hitting an all-time high late in September, has been followed by a surge in volatility and a correction in US stock prices. Shares of Apple, American Airlines and Bank of America have all fallen more than 10 per cent from recent highs, moves not captured in the third quarter results Berkshire presented on Saturday.
Class A shares of Berkshire have climbed 3.6 per cent so far this year and closed at $308,411 apiece on Friday. The rise in Berkshire shares has outperformed the milder 1.9 per cent gain by the S&P 500, the US stock market benchmark, this year.