On Dec 5, 2013, we are downgraded our recommendation on Berkshire Hathaway Inc. (BRK.A) (BRK.B) to Neutral from Outperform following third quarter earnings miss wherein the company gave a negative surprise of 6.9%. The company carries a Zacks Rank #3 (Hold).
Berkshire reported third quarter 2013 operating earnings of $1.49 per share, missing the Zacks Consensus estimate of $1.60 per share. The earnings miss came from a decline in underwriting income from the company’s insurance business, due to cat loss suffered during the quarter.
Berkshire earnings are subject to volatility, given its exposure to catastrophes. Going forward, we believe that the timing and magnitude of catastrophe and large individual losses will continue to produce significant volatility in its property and casualty underwriting results.
Also the succession of Warren Buffett, the CEO and Chairman of Berkshire remains a concern with the investors. Though Buffett has put in place a succession plan and has chosen a successor, the names of the to-be CEO remain under a veil. Therefore, there remains an air of uncertainty regarding the performance of the company under a new CEO.
Moreover the company’s huge investment in derivative contract imparts volatility to the company’s earnings.
Following earnings release, Zacks Consensus Estimate for 2014 earnings went down as 1 out of 2 its estimates moved south by 0.5% to $6.22 per share.
Nevertheless, Berkshire has shown strong favorable operating performance over the past many quarters, with growth coming in from all its segments.
Berkshire’s economically sensitive non-insurance businesses – utilities and energy, and manufacturing, service and retail – are performing well after suffering substantial earnings decline in the recent past due to the weak economy.
Its Finance and Financial Products segment is also performing well, with improving trends in this business segment given that the housing market is improving gradually.
Other better ranked stocks Alleghany Corporation (Y), Cincinnati Financial Corp. (CINF), CNA Financial Corporation (CNA) all with Zacks Rank #1 (Strong Buy) are worth investing in.