Berkshire Hathaway Inc.’s (BRK.A, BRK.B) second quarter earnings of $1.24 per share were ahead of the Zacks Consensus Estimate of $1.01 per share. Earnings also compared favorably to 76 cents per share reported in the prior-year quarter.

Results were positively affected by an increase in revenues from Berkshire’s economy sensitive business — Utilities & Energy and Manufacturing, Service & Retailing. Besides, the recently completed acquisition of the rail road company Burlington Northern Santa Fe (BNSF) contributed massively to the earnings.

However, including investment losses of $1.4 billion on equity derivatives, earnings came in at $1.2 per share, down from $2.1 per share in the prior-year quarter.

Total revenue increased 7.1% year over year to $31.7 billion, primarily due to solid revenues from BNSF coupled with higher revenues from Utilities and Energy, partially offset by decreased revenues from the insurance group.

Investment and derivatives losses during the quarter amounted to $1.1 billion, due to a decline in the estimated value of contracts related to equity markets. However, the same contracts had brought in a gain of $1.5 billion in the prior-year quarter when the equity markets performed well. These losses also led to a 2.5% decline in book value per share to $57.7, which was partially offset by higher operating earnings.

Segment Results

Insurance: Net premium earned was $6.9 billion, up 6.2% year over year, due to a 4.7% and 27.8% increase in premium earned from its insurance companies GEICO and Berkshire Hathaway Reinsurance Group (BHRG), respectively, partially offset by a premium decline of 3.7% and 14.0% from General Re and Berkshire Hathaway Primary Group (BHPG), respectively. Net investment income declined 9.2% to $1.1 billion. Net underwriting gain increased substantially to $462 million from $66 million in the prior-year quarter, primarily led by underwriting income at BHRG which had incurred a loss last year. Also, higher underwriting results were witnessed at GEICO and BHPG.

Utilities & Energy: Total revenues increased significantly to $6.8 billion from $2.6 billion in the prior-year quarter, primarily due to $4.1 billion in revenues from BNSF operations, which started operating as a Berkshire subsidiary in this quarter. Rail demand is bouncing back with an increase in industrial and agricultural activity and reviving consumer demand, a trend that is expected to continue. Revenues from MidAmerican, however, remained flat at $2.7 billion.

Manufacturing, Service & Retailing: Total revenues during the quarter increased 10.8% year over year to $17.0 billion. This was led by an increase of 21.5% in Marmon, 5% in McLane Co., 16% in manufacturing, 19% in service and 4% in retailing businesses.

Finance & Financial Products: Total revenues during the quarter showed a modest increase of 10.6% year over year to $1.1 billion. This was due to a 12% increase from the manufactured housing business (Clayton Homes), partially offset by a 3% decline in furniture/transportation equipment leasing.

The Berkshire balance sheet continues to reflect significant liquidity and a strong capital base. Consolidated shareholders’ equity as of June 30, 2010 was $142.8 billion, an increase of 8.2% 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.

After declining earnings in 2009 for manufacturing, service and retailing business, led by the worldwide economic recession, Berkshire has witnessed an improving performance from these business segments in the first half of 2010 on the back of stabilizing economy. However, its two largest businesses — Insurance and Utilities — remain strong as ever.

Berkshire’s exposure to equity derivatives has caused significant earnings volatility as its performance is tied to the stock markets. However, these contracts do not pose any significant risk to the company as these are long term agreements with expiration beginning in 2018 and 2028.

We maintain our Outperform rating on the shares of Berkshire. The stock carries a Zacks #3 Rank, indicating no clear directional pressure on the shares over the near term.
 
Zacks Investment Research