Late last week, the chairman of Berkshire Hathaway Inc. (BRK.A) (BRK.B), Warren Buffett, announced the preliminary result for the first quarter of 2011. Operating earnings is expected to come in at $1.6 billion, down 27% from $2.2 billion registered in the last-year quarter.
Berkshire’s insurance segment is expected to post underwriting loss of $821 million, weighed down by $1.7 billion of losses incurred due to natural catastrophes in Japan and New Zealand, which occurred during first quarter of 2011. In the year-ago quarter, the segment had earned underwriting income of $226 million. Buffett also commented that all of the company’s businesses, excluding the ones dealing with U.S. housing, are doing pretty well.
Net earnings from Berkshire’s Railroad, utilities and energy segment are anticipated to surge 80% year over year to $908 million. This segment comprises MidAmerican and Burlington Northern Santa Fe Corp. (BNSF), which was acquired by Berkshire in February 2010.
Yet another segment — Manufacturing, Service and Retailing — is expected to spike up 7% year over year and clock in net earnings of $558 million, led by improved results across most of the units due to better economic conditions and higher consumer demand. The units dealing with U.S. residential housing are, however, expected to be feeble due to soft housing market condition.
Berkshire’s Finance and Financial Products segment is likely to generate $96 million of net earnings, an increase of 39% from the prior-year quarter.
Regarding the investment income, Buffet said that he expects it to decline given maturing investments in high yielding companies such as Goldman Sachs and General Electric. Moreover, the current low interest rate environment allows little opportunity for reinvestment.
Berkshire’s net earnings (a GAAP measure) are likely to get affected adversely by $82 million of investment and derivative loss compared with $1.4 billion of gains in the prior-year quarter. We, however, do not take into account these losses and gains in calculating core earnings, as these investments will be held till maturity and the gains and losses emanating from there can change with fluctuations in market prices of these derivative instruments.
Bershire’s preliminary results suggest that the company’s insurance division might not witness profitability for the first time in nine years, due to high incidence of catastrophe loses (cat loses). However, if viewed from a positive perspective, increased cat losses across the industry can have the effect of firming up insurance rates, thereby setting the stage for the return of hard markets, which Berkshire is fully equipped to exploit.
Going forward, we are bullish on Berkshire’s prospects. The stock carries a Zacks #3 Rank, which implies a Hold recommendation over the near term (1–3 months). However, as the economic situation improves and the consumer confidence revives, along with increasing spending, we expect the company to benefit from each of its segments. Thus, over the longer term horizon (6+ months), we rate the shares Outperform.
BERKSHIRE HTH-A (BRK.A): Free Stock Analysis Report
BERKSHIRE HTH-B (BRK.B): Free Stock Analysis Report
Zacks Investment Research
