The second-quarter profit of Berkshire Hathaway rose by 46%. The company reported large gains on paper in the value of its derivative contracts and investments.
This past Friday, Berkshire Hathaway reported a net income of $4.54 billion. This equates to $2763 per Class A share. Last year at the same time, the company gain was $3.1 billion, or $1882 per Class A share.
The biggest factor in the earnings swing was because of the rise in estimated value of their derivatives and investments. Right now, they are worth a total of $622 million. Last year at this time, Berkshire had a $612 million loss on paper in the same categories.
The company grew its revenue by 16% to $44.69 billion. The 80 Berkshire Hathaway subsidiaries generally performed well.
FactSet surveyed three analysts. They came to the general consensus that Berkshire Hathaway’s Class A shares would be worth $2163.63.
A few years back, Berkshire sold derivative contracts that are either directly tied into credit defaults or several global stock indexes. The company has to estimate the value of the contracts each time that it reports earnings. This is regardless of the fact that the contracts will not mature for several years in many cases.
Understand that the true derivative value will not be known until much later on, but they have the ability to create large swings in the net income of Berkshire Hathaway from quarter to quarter.
Without the derivatives and investments of Berkshire Hathaway, the company reported total earnings of $3.92 billion, or $2384 per Class A share. This is higher from a year ago, when they recorded $3.72 billion, or $2252 per Class A share.
Burlington Northern Santa Fe Railroad, subsidiary of Berkshire Hathaway, performed quite nicely during the second quarter. It contributed $884 million to the investment company’s profits. This is up from $802 million just one year ago.
BNSF mentions that there volume was up 3% this year. They also mention that rates improved by 2%. The railroad hauled more crude oil, intermodal containers of products and coal. Coal demand was driven higher by low utility stockpiles and higher natural gas prices.
Tom Lewandowski, analyst from Edward Jones, mentions that Berkshire’s Burlington Northern Santa Fe acquisition in 2010 looks better each passing year.
“The ability to deliver consistent results that grow steadily is very attractive,” Lewandowski said. He recommends buying Berkshire Hathaway stock.
The insurance businesses of Berkshire Hathaway – including car insurer Geico and reinsurance behemoth General Re – added $530 million this quarter to the company’s net income. This is actually down from a year ago when they earned $619 million. This is mainly due to Berkshire recording a pretax loss of $189 million because of flooding in Europe.
Berkshire Hathaway owns several businesses directly tied to the housing market. They include HomeServices of America real estate broker network, Acme Brick and Shaw carpet.
Each of those companies posted larger profits. This is due to the fact that the housing market continues to recover. Berkshire also mentions that their real estate brokerage revenues rose by 29% to $115 million in the second quarter.
Berkshire Hathaway owns a wide variety of companies, including jewelry, clothing and furniture firms. 50% of the company’s net income is technically driven by its utilities and insurance businesses. They also invest heavily in companies such as Wells Fargo and Coca-Cola.