Berkshire Hathaway Downgraded to Neutral

Zacks downgraded Berkshire Hathaway stock to Neutral on December 5, 2013. The stock was previously ranked at Outperform. The downgrade was due to the earnings miss, and the company gave a negative surprise of 6.9%. The stock is currently listed as a Hold.

Why Downgrade Berkshire Hathaway?

During the third quarter of 2013, Berkshire Hathaway reported operating earnings of $1.49 per share. They missed Zacks consensus estimate by $.11, because they believed it would be $1.60 per share. The decline came from a lack of underwriting income in the insurance business of the company, all because they suffered a catastrophic loss during the third quarter.

The company’s earnings are always subject to volatility, and this is especially true because of the exposure to catastrophes. Zacks believes that the exposure to catastrophes can result in more large individual losses, and they believe it will also produce more volatility in the casualty and property underwriting results.

Another area in question is the successor of Warren Buffett, the current chairman and CEO of Berkshire Hathaway. Many investors look at this as a real concern. We know that Buffett has a succession plan in place and a successor is already chosen, but the name of the individual is currently being kept under wraps. So there is still uncertainty in the market as to whether or not the new CEO is going to be able to perform at the same level of Warren Buffett.

Also the huge company investment in derivative contracts creates volatility with company earnings.

After the third quarter earnings report, Zacks Consensus Estimate for the year 2014 went down. One of two of its estimates was lowered by 0.5% to the amount of $6.22 per share.

Even so, Berkshire Hathaway has shown that it has a strong favorable operating performance over many quarters in the past, and each one of its segments has shown growth.

Its noninsurance businesses – retail, service, manufacturing, energy and utilities – are all performing very well even though they suffered substantial earnings declines in the recent past because of the current weak economy.

The financial products segment is also performing well, plus they are seeing trends improve in the business segment now that the housing market has gradually improved as well.