Berkshire Hathaway Operating Earnings Rise 42%

Omaha, Nebraska ( TheStreet) -- Berkshire Hathaway ( BRK.A) late on Friday reported a very solid first quarter, as the Warren Buffett-run conglomerte continued to hit new record highs amid a stock market recovery that's lifted the value of its investments spread across stocks, energy, transportation and housing, among others.

Berkshire reported first-quarter operating earnings of $3.782 billion, or $2,302 per Class A share, increasing from $2.665 billion, or $1,615 billion per Class A share, during the first quarter of 2012.

Factoring in $$326 million in gains on investments and $784 million in gains on derivatives, first-quarter net earnings to Berkshire Hathaway shareholders came in at $4.892 billion, or $2,977 per Class A share, increasing from $3.345 billion, or $1.966 a share, a year earlier. During the first quarter of 2012, the bottom-line results included $70 million in investment losses and $650 million in gains on derivatives.

First-quarter revenue totaled $43.867 billion, increasing from $38.147 billion in the first quarter of 2012.

The consensus among analysts polled by Thomson Reuters was for Berkshire Hathaway to report a first-quarter profit to shareholders of $3.743 billion on revenue of $42.213 billion.

In its Insurance and Other segment, Berkshire saw earned insurance premiums increase 16% year-over-year to $9.377 billion, while sales and services revenue also grew 16%, to $22.418 billion.

Shares of Berkshire Hathaway have returned 21% this year, hitting a new all-time high on Friday, closing at $108.64.

Berkshire Hathaway's earnings come just ahead of the firm's May 4 annual shareholder meeting.

For its combined insurance units, Berkshire reported a pre-tax underwriting profit of $974 million, improving from an underwriting loss of $191 million a year earlier.

Berkshire's underwriting profit improvement came on the heels of similar improvement for American International Group ( AIG), which late on Thursday reported its first underwriting profit since the second quarter of 2009.

The company's Railroad, Utilities and Energy segment, which includes MidAmerican Energy and BNSF Railways, saw 6% year-over-year revenue growth, to $8.4 billion in the first quarter.

Shareholders are investing in Berkshire's ownership of operating businesses and the leverage that the company should get from the next five-to-10 years of economic improvement, according to William Smead, chief investment officer of Smead Capital, an investor in Berkshire's B-shares.

"I expect Mr. Buffett and Mr. Munger to share how undervalued they still think their stock is... I would love to get reinforced on that," Smead said, of his expectations heading into the firm's annual meeting Saturday.

As Buffett welcomes investors to the shareholder meeting, the "Oracle of Omaha" isn't likely to rest on his laurels.

In Berkshire's 2012 annual shareholder letter, Buffett lamented the underperformance of the firm's book value growth relative to the S&P 500, and even outlined a path towards a dividend.

TheStreet will be live-blogging Berkshire's shareholders' meeting, starting at 8AM ET on Saturday:

Buffett fears Berkshire's five-year book value growth rate may underperform the S&P 500 for the first time ever. In 2012, Berkshire's book value per share increased 14.4%, behind the S&P 500's gains of more than 15%.

In a twist to the shareholder meeting, Doug Kass -- head of Seabreeze Partners and a contributor at TheStreet -- will present a case for shorting shares of Berkshire Hathaway.

While Kass will certainly have room to make an argument, and he could even borrow Buffett's words, shorting Berkshire Hathaway shares has made for a disastrous trade over multiple decades.

Kass, who said he is shorting Berkshire's Class B shares and is slightly underwater since initiating the position about a month ago, has bet against the "Oracle of Omaha" before.

In March 2008, Kass wrote an article for TheStreet outlining 11 reasons to short Berkshire shares. Subsequently, Berkshire shares fell about 40% amid a collapse in the U.S. financial sector.

On Saturday, Kass told TheStreet his participation as a Berkshire bear will add a novel element to the annual meeting.

" Warren Buffett was probably feeling the questions were getting a bit redundant... I think he wants to be challenged," Kass told TheStreet.

"I have one big challenge for him, which I think will reverberate the auditorium," Kass said.

Kass's participation at Berkshire's shareholder meeting may also underscore investor concerns about the direction of the company such as management transition and a deployment of the company's cash stockpile.

"I think the succession question will be obviously front and center," said Thomas Russo, a partner at Gardner, Russo & Gardner in an April interview. "I gather there will be some commentary."

In late 2011, Buffett also said his son, Howard Buffett, would succeed him as a non-executive chairman of Berkshire to oversee a maintenance of the firm's values.

Less clear is who would be chief executive of Berkshire Hathaway. Currently, speculation centers on insurance unit head Ajit Jain, BNSF railroad CEO Matthew Rose, MidAmerican Energy CEO Greg Abel as leading candidates to be Buffett's successor.

Buffett has informed Berkshire Hathaway's board of directors of his successor.

Russo, the Berkshire investor, sees room for multiple job openings to replace Buffett, when the time comes. He expects up to four roles to fit the shoes of Buffett.

Gardner, Russo & Gardner is Berkshire's tenth largest shareholder with a stake of nearly $800 million in the company's Class A shares and over $200 million of Class B shares, according to Bloomberg data. Russo says Berkshire holding's represent about 11% of the firm's assets.

Berkshire's annual meeting will certainly celebrate the strong growth of many of the firm's operating units and its stock market portfolio.

Berkshire Hathaway is "well positioned to benefit from improving earnings in its non-insurance business as the economy recovers, as well as from robust property-casualty insurance results," Jay Gelb, a Barclays analyst, wrote in a 129-page note Thursday that gives an "overweight" rating to Berkshire's Class A and B shares and respective price targets of $178,500 and $119 a share.

Gelb noted that Berkshire had roughly doubled the S&P 500's gains in 2013, with the outperformance reflecting "substantial exposure to an improving economy and housing market, in addition to a strong positioning to rising equity markets."

Currently, Berkshire holds about $90 billion in equity market investments, according to data compiled by Bloomberg, with Coca-Cola ( KO), Wells Fargo ( WFC) and International Business Machines ( IBM) standing out as the firm's three largest stock holdings.

"We expect Berkshire shares to benefit from strong growth in both book value per share and earnings, driven by its insurance and non-insurance businesses," wrote Gelb.

The contribution to operating earnings from Berkshire's non-insurance businesses increased from 43% in 2006 to 70% in 2012, according to the analyst.

Buffett, at 82 years old, continues to show little sign of slowing, as evidenced by a joint deal with 3G Capital to buy Heinz, the iconic ketchup maker.

If there is an elephant in the room in Omaha's CenturyLink Center, where the shareholder meeting will occur, it is roughly $12 billion in free cash flow and $35 billion in pro-forma cash Buffett and Berkshire will wield for future acquisitions.

Buffett has called Berkshire's cash an elephant gun to bag large acquisitions and said in his 2012 shareholder letter he remains on the prowl for big deals.

At last year's shareholder meeting, Buffett said the firm had nearly signed onto a $20-billion acquisition, but dropped out over a disagreement on price. Smead, the investor in Berkshire B shares, said Buffett could target Aflac, if the insurer's founding family ever offered an acceptable price.

Buffett could also buy Mars if a deal were ever pitched to Berkshire, according to Russo of Gardner, Russo & Gardner.

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price," Buffett said in his 1989 shareholder letter.

-- Written by Antoine Gara in Omaha, Nebraska

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