Warren Buffett's Pain Points: Mother Nature and Big Oil
Warren Buffett's Berkshire Hathaway (BRK.A) - Get Report posted lower quarterly operating profit than Wall Street projected as auto insurer Geico grappled with $100 million in storm losses, mostly in Texas, and low oil prices curbed shale-fracking shipments at Burlington Northern railroad.
Operating earnings of $2,274 a share compared with the $2,761 average of estimates in a Bloomberg survey, while revenue climbed 7.7% to $52.4 billion. A preliminary report before last weekend's annual meeting, which didn't include revenue or per-share data, showed operating profit of $5.59 billion.
Friday's complete report from the Omaha, Neb.-based conglomerate contained few surprises overall. Comments from Buffett and the heads of Berkshire's subsidiary companies at the annual meeting, combined with the preliminary figures, had already indicated challenges at both Burlington Northern, one of the largest North American railroads, and a 56% drop in profit from insurance underwriting.
Underwriting income of $213 million was curbed mostly by a pre-tax loss of $79 million at Berkshire Hathaway Reinsurance, which had reported profit of $459 million a year earlier. Earnings at Geico climbed 65%, meanwhile, reflecting higher premiums set last year to offset a spike in claims. Still, storm losses in the property and casualty business took a toll in the first quarter and will affect earnings for the three months through June as well, the company said.
"Geico was particularly improved," and its gains made up for weaker results in other insurance businesses, Jim Shanahan, an analyst with Edward Jones, said in a phone interview. "We expected reinsurance results to be volatile, and they were, but investors tend to focus more on the more predictable Geico results."
Revenue at Burlington Northern, which has nearly 33,000 miles of track in 28 states, fell 15% to $4.77 billion. Industrial product freight sales dropped 18% to $1.2 billion amid lower shipments of petroleum products and sand used in fracking, a segment of the U.S. oil industry hit hard by crude prices that are more than 50% below their 2014 peak.
"With oil at current low prices, we expect that volumes in these categories will be lower for the remainder of 2016," Berkshire said in a regulatory filing.
Manufacturing revenue rose 19% to $10.6 billion, a gain that Shanahan said was only partially due to the addition of sales at two recent acquisitions, Precision Castparts and Duracell, for part of the three-month period. Buffett paid about $32.5 billion for the aerospace equipment maker and $4.2 billion for the battery producer, which was previously part of Procter & Gamble's portfolio.
"They were basically stub periods" for the acquisitions, he said. "Broader improvement was what drove those results."
Among the best news for Berkshire is that its investment gains more than doubled to $1.85 billion, while housing growth bolstered both manufactured-home maker Clayton Homes and paint producer Benjamin Moore.
Returns on Buffett's "Big Four" stock holdings, however, have been a mixed bag. Both Coca-Cola (KO) - Get Report and IBM (IBM) - Get Reporthave gained more than 5% this year, while American Express (AXP) - Get Reporthas dropped 8% as it struggles to replace revenue lost with the demise of its Costco branded-card deal, and Wells Fargo (WFC) - Get Reporthas fallen more than 10% amid souring energy loans.
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