Berkshire Operating Profit Climbs 6.6% on Manufacturing Gain

(Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc. said third-quarter operating profit rose 6.6 percent on contributions from newly acquired manufacturing businesses.

Operating earnings, which exclude some investment results, climbed to $4.85 billion, or $2,951 a share, from $4.55 billion, or $2,769, a year earlier, according to a statement Friday from the Omaha, Nebraska-based company. That missed the average $3,058-a-share estimate of three analysts surveyed by Bloomberg. Net income fell 24 percent from a year earlier when Buffett booked a large gain on an investment in Kraft Heinz Co.

Buffett, 86, has long told shareholders that they should focus on the underlying earnings of Berkshire’s operating businesses, rather than one-time gains or losses on securities. Since the beginning of the year, he’s added to his company’s stable of subsidiaries, completing deals for battery-maker Duracell and Precision Castparts Corp., a global supplier to the aerospace industry.

“I view these results as OK -- not terrible -- given all the headwinds that are out there,” said Cathy Seifert, an equity analyst at CFRA Research who has a “hold” rating on the shares.

Several of Berkshire’s large businesses struggled in the third quarter, however. The insurance group reported that underwriting profit slipped 34 percent to $272 million as results worsened at the company’s namesake reinsurance business and auto insurer Geico. Income from Berkshire’s railroad, BNSF, fell about 12 percent to $1.02 billion on reduced demand for coal and petroleum products.

Railroads have relied on price increases, as opposed to volume gains, to boost profits over the past decade. That may be coming to an end. Union Pacific Corp., which competes against BNSF in the western U.S., said last month that its pricing power had eroded with a decline in freight demand.

Manufacturing, Energy

Profit from the manufacturing, service and retail segment rose 45 percent to $1.7 billion because of the addition of Precision Castparts and Duracell. Aggregate earnings for the rest of the businesses in the group fell, Berkshire said in a regulatory filing. Buffett completed the acquisition of Precision in the first quarter in one of his largest deals.

One bright spot was the utility unit, Berkshire Hathaway Energy. It contributed $932 million in profit, compared with $786 million a year earlier, on higher electric rates and increased wholesale volumes. The business operates electric grids in the U.K., natural gas pipelines that stretch from the Great Lakes to Texas and power companies in states including Iowa and Nevada.

Book value, a measure of assets minus liabilities, rose to $163,783 per share at the end of September from $160,009 three months earlier. The cash pile rose to a record $84.8 billion. The previous high mark was $72.7 billion on June 30.

Part of the increase in cash during the quarter came from the sale of preferred stock in chewing-gum maker Wrigley. The transaction was completed at the end of September and drove a a gain of $2.35 billion on derivatives and investments. A year earlier, Berkshire recorded a gain of $4.88 billion in that area because of an increase in the value of its investment in Kraft Heinz.

Berkshire has said such marks are “often meaningless” and don’t help in understanding the company’s performance. Nonetheless, they were responsible for the drop in net income, which declined to $7.2 billion in the third quarter from $9.43 billion a year earlier.

Berkshire’s Class A shares have climbed 8.5 percent in 2016 to $214,545 at 4 p.m. in New York, beating the 2 percent gain in the S&P 500 Index. The statement was released after the close of regular trading.

--With assistance from Katherine Chiglinsky To contact the reporter on this story: Noah Buhayar in Seattle at nbuhayar@bloomberg.net. To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net, Dan Reichl