Berkshire Reports Earnings Growth

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Berkshire Hathaway Inc. (BRK.A)(BRK.B) reported its second quarter 2012 operating earnings of $1.50 per share, compared with earnings of $1.09 in the year-ago quarter.

Net income (a GAAP measure), which includes a number of one-time items, came in at $1.25 per share, down from $1.38 per share earned in the year-ago quarter. The decline in earnings was the result of loss on sale of derivative contracts
 
Total revenue inched up 0.7% year over year to $38.5 billion, led by higher revenues across all its business segments.

Segment Results

The Insurance Group segment reported revenue of $9.8 billion, down 5.1% year over year. The segment reported a net insurance underwriting gain of $617 million as against an underwriting loss of $7 million in the year-ago quarter, a period which was marked by significant catastrophe losses.   

The Railroad, Utilities and Energy segment’s total revenue increased 4.6% year over year to $7.8 billion. Of the total segment’s revenue, approximately 65% came from Burlington Northern Santa Fe, the railroad company, which was acquired in February 2010.

An increase in industrial and agricultural activity has automatically revived the demand for rail services, thereby resulting in greater consumer demand for the segment. The trend is likely to continue in the future. Revenue from MidAmerican, which comprises other businesses of the segment, remained almost unchanged at $2.7 billion.

Total revenue of the Manufacturing, Service and Retailing segment climbed up 14.3% year over year to $20.8 billion, on the back of an increase in all the sub-businesses – Marmon, McLane Company, Other manufacturing and service  and Retailing. Marmon’s revenue improved 4.6%, McLane’s 6.6% and other manufacturing, servicing and Retailing, which includes a wide array of businesses, saw a 35% increase in revenue.

The Finance & Financial Products segment’s total revenue hiked 2.5% year over year to $1.02 billion. The increase was attributable to a 3.5% and 1.6% rise in revenue from the segment’s manufactured housing & finance and furniture /transportation equipment leasing businesses, respectively.

Omaha-based Berkshire continues to boost its balance sheet. Consolidated shareholders’ equity or net worth as of June 30, 2012 was $181.7 billion, up 7.5% from December 31, 2011.

Berkshire is a conglomerate, which houses over 80 different businesses, along with equity investments in many companies. The company has seen its earnings fluctuate from one quarter to another due to its heavy exposure to stock option derivatives. However, most of these derivative gains/losses are unrealized.

Other than the derivatives-related earnings fluctuations, we see that most of Berkshire’s businesses – Insurance, Railroad, Utilities and Energy, Manufacturing, Service and Retailing – performed well. Its Finance and Financial products segment, which had suffered due to a soft housing market, is also recovering gradually. Going forward, we expect the company to perform favorably.

We maintain our ‘Outperform’ recommendation on the shares of Berkshire Hathaway. The stock retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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