Buffett’s U.S. Focus Could Help Berkshire Dodge Some Trade Issues

(Bloomberg) -- Warren Buffett’s enthusiasm for American businesses could help his Berkshire Hathaway Inc. navigate its way through the turbulent trade environment.

Over the past five decades, Buffett, 87, has built Berkshire into a $490 billion company with footholds in manufacturers, insurers, utilities, retailers and a railroad. As Berkshire has swelled, many of the the Omaha, Nebraska-based company’s operations continued to focus on the U.S., according to Cathy Seifert, an analyst at CFRA Research. That could help the company weather the storm of escalating trade tensions across the globe.

“If the U.S. economy remains strong, then they probably will be less impacted than other companies that have larger international exposure,” Kai Pan, an analyst at Morgan Stanley, said in an interview.

Buffett has long rallied behind the U.S., crediting America’s “economic dynamism” for aiding Berkshire’s earnings and saying that nearly 90 percent of the company’s investments are made in the country. As U.S. and China officials sparred over tariffs, the billionaire investor expressed optimism in May that they would be unlikely to “sacrifice” prosperity.

“The countries of the world have done remarkably well with trade,” he said at his annual shareholder meeting. “The only problem gets to be when one side or the other may want to win a little bit too much, and then you have a certain amount of tension.”

Worsening trade relations still could hurt Berkshire, where Buffett is chief executive officer and chairman. In recent years, he has snapped up a railroad and a maker of parts for the aerospace industry, expanding Berkshire’s reach into industrial sectors. Those operations, BNSF Railway and Precision Castparts, might find trouble if the trade tensions escalate, according to analysts.

A slowdown in international commerce would mean fewer rail shipments, according to analyst Meyer Shields at Keefe Bruyette & Woods Inc. and CFRA’s Seifert. Pan said that Precision Castparts could suffer from rising steel and aluminum prices.

“One area that you can point to that would be impacted would be BNSF, because of the impact of transporting things to ports,” Seifert said in an interview.

Here’s what some companies have said about tariffs

Companies from Tyson Foods Inc. to Caterpillar Inc. have been warning investors about the potential effects of tariffs. Berkshire is scheduled to release earnings Friday, which could give investors a glimpse about how the company views the issue.

Analysts cautioned that any spillover effects from a heated trade war will likely take some time to materialize and might not show up in Berkshire’s results for a while, if at all. The effect could also be hard to gauge immediately as Buffett typically avoids giving any guidance. Companies including Tyson and Daimler AG have reduced profit forecasts because of tariffs.

Beyond any disclosure on the trade situation, here’s what we’ll be focusing on when Berkshire reports results Friday:

Rising Rates

The firm’s insurance operations have been reeling from the worst year for underwriting in more than a decade after hurricanes slammed the U.S. and Caribbean. Still, the first quarter resulted in an underwriting gain from Berkshire’s insurers. That was helped by Geico, which has been raising rates to offset losses as more people hit the road.

“Geico should have a really good quarter,” KBW’s Shields said in an interview. “We’ve seen almost anyone that does personal auto insurance that has reported put up really good results, which is a combination of rate increases and a little bit less driving because gas prices are higher.”

Cash Pile

Buffett’s company keeps raking in the cash, with that pile climbing to $109 billion during the first three months of the year. The billionaire investor has lamented that he and his business partner, Charles Munger, have struggled to find acquisitions to spend some of that cash.

Buffett opened up another avenue for capital deployment in July when Berkshire’s board eliminated a cap on stock buybacks. Buffett and Munger can now repurchase Berkshire stock whenever they think the price is below Berkshire’s “intrinsic value, conservatively determined.”

“They have a lot of dry powder,” Morgan Stanley’s Pan said. The company can do both buybacks and acquisitions, “and the earnings will keep adding to that excess cushion.”

Chugging Along

BNSF spans the western U.S., helping to carry carloads of items such as agricultural products and coal. The business is likely to benefit from healthy economic activity in the U.S., according to KBW’s Shields. The U.S. economy experienced a 4.1 percent rate of growth in the second quarter, the fastest since 2014.

Wild Swings

Berkshire now faces swings in its net income under a new accounting rule that requires the company to report unrealized gains or losses in its stock portfolio. Buffett has warned that investors should ignore those swings as they can often vary widely and don’t reflect the underlying results of Berkshire’s businesses. He’s even deemed the accounting change a potential “nightmare.”

Still, those swings could be more of a “sweet dream” this time around as second-quarter gains in stock holdings boost net income, Pan said. Barclays Plc’s Jay Gelb estimates that those mark-to-market gains could be about $3.8 billion after taxes because of Buffett’s bets on Apple Inc., Wells Fargo & Co. and American Express Co.

©2018 Bloomberg L.P.