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Warren Buffett's Berkshire Hathaway reveals how inflation, worker shortages, supply constraints, and flagging consumer demand are hitting American companies

·5 min read
Warren Buffett
Warren Buffett.Chip Somodevilla / Getty
  • Berkshire Hathaway's Q2 earnings provide valuable insights into the health of the US economy.

  • Warren Buffett's company faced inflation, worker shortages, supply woes, and patches of weak demand.

  • Geico faced higher prices for used cars and auto parts, while McLane battled to find truck drivers.

American companies are battling numerous headwinds, such as inflation, shortages, supply-chain disruptions, and concerns about consumer spending.

Warren Buffett's Berkshire Hathaway owns scores of businesses, including insurers, railroads, utilities, manufacturers, distributors, retailers, and service providers. That makes the company a microcosm of the wider US economy.

Buffett's conglomerate recently published its second-quarter earnings, which offered a fresh look at how everything from higher fuel prices to wage inflation and worker shortages to interest rates are affecting American businesses.

Here are nine Berkshire divisions dealing with major headaches:

Insurance

Geico statue
Markets Insider

Geico recorded a pretax underwriting loss of nearly $500 million in the second quarter, compared with a gain of $626 million in the same period last year.

The auto insurer, known for its gecko mascot, blamed higher used-car prices and shortages of auto parts, which made paying out insurance claims more expensive.

 

Railroads

BNSF booth at BRK annual meeting
Markets Insider

The BNSF Railway reported a 70% rise in its first-half fuel expenses as a result of higher energy prices. However, it passed the increase on to customers via greater fuel surcharges, which drove a double-digit increase in its average revenue per railcar.

Notably, the freight-railroad network carried lower quantities of consumer, industrial, and agricultural products in the quarter. It blamed those declines respectively on international supply-chain disruptions, fewer petroleum shipments due to less demand for crude by rail, and reduced grain exports.

On the other hand, BNSF's coal revenues jumped 30% in the first six months of this year, reflecting more electricity generation, higher natural-gas prices spurring customers to switch fuels, and greater export demand.

Utilities and real estate

Berkshire Hathaway HomeServices stand at the annual meeting.
Markets Insider

Several of Berkshire's utilities benefited from higher retail and wholesale energy prices in the quarter. However, MidAmerican Energy's profits were tempered by higher costs for the power it purchased.

Berkshire's real-estate brokerage saw its profits decline in the period, as rising interest rates tempered demand for its mortgage, brokerage, and settlement services.

Industrial products

BRK meeting: IMC booth
Markets Insider

Berkshire's industrial-products division was hit by higher costs, supply-chain disruptions, and labor shortages in the quarter. Those headwinds largely offset higher average selling prices and greater demand for certain products.

Precision Castparts — a manufacturer of aerospace parts — noted that both materials and utilities rose in price last quarter, and that worker shortages led to manufacturing inefficiencies.

Lubrizol, a chemicals specialist, said shortages of raw materials weighed on its first-half sales volumes. It also hiked prices to offset rising costs of raw materials such as oil feedstocks, as well as of utilities, packaging, and shipping.

Marmon, an industrial conglomerate, benefited from higher average prices for metals, but took a $90 million blow from the shutdown of its rail-and-leasing business in Russia.

Building products

BRK meeting: Clayton Homes
Markets Insider

Berkshire's building-products division — home to brands such as Clayton Homes and Benjamin Moore — gained from robust demand for residential construction in the first half of 2022.

However, it expects higher home-mortgage rates to weaken demand for homebuilding, which should weigh on its performance over the coming months.

The segment continues to suffer from supply-chain disruptions and sharp cost increases for many raw materials as well as energy, freight, and labor. However, it benefited from higher average selling prices last quarter, as it passed on its increased input and transportation costs.

Consumer products

BRK Meeting: Forest River
Markets Insider

Berkshire's consumer-products segment — which houses brands such as Brooks and Fruit of the Loom — suffered a 16% drop in apparel sales last quarter, as retailers' ballooning inventories resulted in their ordering less stock.

Moreover, apparel-and-footwear earnings roughly halved due to lower sales volumes, manufacturing inefficiencies, and higher costs for raw materials, freight, labor, and other inputs. Berkshire warned the trend was likely to continue for the rest of this year.

Forest River, a maker of RVs and pontoon boats, reported higher costs of materials, and signs of slowing demand after several years of exceptional growth.

Services

BRK Meeting: NetJets
Markets Insider

TTI, an electronics distributor that cashed in on the microchip shortage during the pandemic, is starting to see demand slow due to higher inventory levels across the industry's supply chain.

NetJets and FlightSafety passed on higher fuel prices to customers in the form of surcharges. However, they reported lower earnings, as they had to use subcontracted aircraft to meet an exceptional increase in customer flight hours.

Retailing

BRK meeting: See's Candies
Markets Insider

Berkshire Hathaway Automotive saw more valuable transactions on average, but sold fewer vehicles in the quarter. The car-dealer network blamed limited production of new vehicles by automakers, which reflected microchip shortages and other supply-chain disruptions.

Berkshire's home-furnishings businesses reported higher average selling prices but lower transaction volumes, leaving their revenues virtually flat.

The rest of Berkshire's retailers suffered a 21% slump in earnings, largely due to a poor performance by its furniture sellers and Pampered Chef.

McLane

trucking
Associated Press

McLane, a wholesale distributor of grocery and nonfood items, blamed a 16% drop in first-half profits on higher costs of personnel, fuel, and insurance.

The subsidiary was also hit by supply-chain constraints, including shortages of truck drivers and other workers, as well as by higher inventory costs. McLane warned the tricky backdrop would likely persist for the rest of this year.

Read more: Value investors have missed out on massive gains by dismissing the likes of Amazon and Alphabet as overpriced. Fund manager and writer Adam Seessel explains how to fairly value tech champions, and avoid losing out again.

Read the original article on Business Insider