Berkshire Hathaway Inc.‘s (BRK.A) (BRK.B) fourth-quarter operating earnings of $1.66 per share was up 38% year over year led by an increase in operating earnings from its non-insurance businesses – Utilities & Energy and Manufacturing, Service & Retailing. Its insurance business, which includes underwriting and investment, however, reported a 1.1% decline in operating earnings. Overall operating earnings increased 4.3% over the prior-year period.
However, net income, which takes into account investment and derivatives, came in at $2.7 per share, up 41% year over year, due to $1.4 billion of investment and derivative gains compared with $1.1 billion gain in the year-ago quarter.
Total revenue escalated 19.8% year over year to $36.2 billion, due to revenue increases all across the board. However, Burlington Northern (“BNSF”), acquired in February 2010, was the major contributor to the upswing.
Investment and derivative gains during the quarter amounted to $4.1 billion up substantially from $318 million last year, due to higher gains from disposal of equity and other securities.
Total revenue for the full year 2010 was $136.2 billion up 21% year over year, led by an increase in insurance premium earned, higher revenues from railroad, utilities and energy businesses, and significantly higher investment and derivative gains. EPS of $5.0 per share was also higher than $3.6 per share last year.
Segment Results
Insurance and Other reported revenue of $105.3 billion for full year 2010 up 13% year over year. Net premium earned was $30.7 billion, up 10% year over year, attributable to an increase of 5.1% and 36% in premiums earned from its insurance companies GEICO and Berkshire Hathaway Reinsurance Group (“BHRG”), respectively, partially offset by a premium decline of 1.7% and 5.5% from General Re and Berkshire Hathaway Primary Group (“BHPG”), respectively.
Net investment income declined 9.3% to $3.9 billion. Net underwriting gain surged 44.4% to $1.3 billion mainly on account higher underwriting gain from GEICO and BHPG.
Railroad, Utilities and Energy: Total revenue for full year 2010 more than double to $26.4 billion from $11.4 billion last year, primarily due to $15.1 billion in revenues from recently acquired railroad company Burlington Northern (BNSF, which started operating as a Berkshire subsidiary in third quarter 2010.
Rail demand is bouncing back with an increase in industrial and agricultural activity and reviving consumer demand, a trend that is likely to continue. Revenues from MidAmerican, however, remained flat at $11.3 billion compared with $11.4 billion last year.
Finance & Financial Products: Total revenue for full year 2010 remained unchanged at $4.6 billion relative to the prior year quarter led by flat revenues from the manufactured housing business (Clayton Homes) as well as furniture/transportation equipment leasing segment.
Berkshire, the Omaha-based company continues to grow its balance sheet. Consolidated shareholders’ equity or net worth as of December 31, 2010 was $157.3 billion, reflecting an increase of 20% from December 31, 2009. The increase includes approximately $10.6 billion related to the issuance of Berkshire common stock in connection with the BNSF acquisition.
Though Berkshire’s insurance business has been a major earnings contributor in 2009, it has been losing ground to its non-insurance related business as seen from the results for 2010. Going forward, we believe this trend will continue with the US economy gradually improving, thereby boosting demand for its Utilities & Energy and Manufacturing, Service & Retailing and Railroad business. Further, a solid balance sheet, adequate liquidity and growing book value are among the positives.
The stock of Berkshire carries a Zacks #3Rank, which translates into a short-term Hold rating. We also retain our long-term (over 6 months) Outperform recommendation on the shares, given its improving business environment.
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