- Berkshire Hathaway's long-term case for investment remains strong as Trump presidency and oil price normalization will stem losses from BNSF.
- Recent economic data points towards a more favorable interest rate environment, supporting the group's insurance businesses.
- Record cash of $85 billion for the third quarter, increases the likelihood of acquisitions, which should drive future growth.
Berkshire Hathaway Inc. (NYSE:BRK.A) is an American conglomerate with investments in a variety of businesses from American Express to Coca-Cola. It reported Q3 earnings last week, which were in line with analysts’ expectations, as the group revealed a 7% increase in operating profit compared to the same period last year.
Although the group revealed mixed performance from its various subsidiaries, investors have snapped up the opportunity to increase exposure to the American Conglomerate with shares hitting an all-time high during yesterday’s trading session (Nov 14). Yet, for investors questioning whether Berkshire Hathaway is overbought, there are encouraging signs for continued long-term growth and capital gains. Let’s take a look at the main winners and losers in Berkshire’s portfolio. (See also: Where Warren Buffett Might Invest Berkshire's Huge Cash Pile? Berkshire Hathaway Inc. Stock)
Burlington Northern Santa Fe (BNSF) – Gathering Steam Despite A Risky Track
BNSF is a freight railroad corporation transporting a ton of stuff from coal to materials used in shale gas extraction. BNSF continues to be a drag on performance as the lower price environment for coal and petroleum products stifles demand for shipments.
This was evident during the Q3 report, as revenues slumped nearly 8% when compared to same period last year despite the best efforts of the management to implement cost cutting measures, which reduced operating expenses by 6%.
However, many have speculated that President-elect Donald Trump could be the savior of the coal industry as he promised to bring back mining jobs and take a stance against U.S. regulations on clean coal. In fact, shares of major coal producers have rallied after Donald Trump won a decisive victory, not least Energy Peabody, the nation’s largest coal producer, which surged nearly 50% after Donald Trump won the Presidential election.
As oil prices normalize, demand for both petroleum products and materials used for extracting oil could stabilise during 2017. Together they make up a large component of BNSF shipments.
Insurance & Reinsurance – Mixed Results In A Challenging Environment
Buffett recently noted that “insurers may face profit problems” as the prolonged low-interest rate environment hurts the ability of insurers to earn returns from investments to meet payouts.
These problems were thematic in Berkshire's Q3’ 16 report, as operating profit for its insurance and reinsurance operations dropped 10.5%, with underwriting income falling 34%, resulting in a decline in pre-tax underwriting income to $409 million, a 36% decline compared to a year earlier.
Geico, the main part of Berkshire’s insurance businesses, revealed a 12% increase in premiums earned as policies-in-force increased 5% over the last three-quarters of 2016, yet pre-tax profit tumbled almost 50% to $138 million, when compared to a year earlier, the only redeeming factor for Berkshire is that any losses arising from Hurricane Matthew will not be material. (See also: Should Warren Buffett Buy Facebook Inc (FB) Stock?)
Clearly, challenges remain in a lower interest rate environment, as insurers usually price their products using expected long-term average rates. However, the chances for a steep increase in interest rates at the end of 2016 and further in 2017 have been strengthened by recent economic data, which could help to stem the leak in this segment of Berkshire’s portfolio.
The New Kids On The Block Energize Berkshire As Cash Soars
Berkshire Hathaway’s capture of both Duracell and Precision Castparts earlier in the year has driven performance in its manufacturing, service and retail operations segment. Aircraft component and energy-production equipment producer and supplier, Precision Castparts, is the stand out performer, helping Berkshire to close the quarter with a record $85 billion in cash.
Although, Buffett prefers to set $20 billion aside as cushion, $85 billion represents sufficient firepower for potential acquisitions during 2017, which should help offset any potential woes from its insurance and transportation segments.
Moreover, with Trump at the helm, some sectors of the market will be tarnished with the uncertainty brush, presenting Buffett with a few acquisition targets with attractive intrinsic values, which is one of the measures by which Buffett assesses potential investments.