NEW YORK (TheStreet) -- Berkshire Hathaway (BRK.A) saw its operating earnings fall over 5% to $3.5 billion as insurance margins at the Warren Buffett-conglomerate dropped, crimping profits. Still, the company's first-quarter earnings indicate a continued payoff from bets Buffett has made on energy, infrastructure and an improving U.S. economy in the years since the crisis.
By Warren Buffett's preferred valuation metric, Berkshire Hathaway outperformed the S&P 500, a reversal of a trend of under-performance in recent years.
Berkshire reported $45.4 billion in revenue and net income of $4.7 billion, or net earnings per share of $2,862 per Class A share. Operating earnings were $2,149 per Class A share, generally slightly below analyst consensus.
The company was expected to earn $47.6 billion in revenue and net income of $2.2 billion, according to analyst estimates compiled by Bloomberg.
Of note, revenue at Berkshire's railroad, utilities and energy divisions rose to $9.75 billion, an over 20% rise in the first quarter from year-ago levels.
Insurance revenue, by contrast, rose marginally to $33.9 billion versus the first quarter of 2013. Overall, flat insurance revenues and rising costs meant Berkshire's net income fell slightly year-over-year.
Investment gains at Berkshire Hathaway surged to $1.059 billion for the quarter, up more than 100% from the $434 million in gains the company reported in the first quarter of 2013. Those gains were buoyed by $188 million in earnings attributable to Berkshire from its participation in the takeover of ketchup-maker H.J. Heinz, a deal announced in the first quarter of 2013.
Book value at Berkshire Hathaway increased 2.6% to $138,426 per class A share, outpacing the S&P 500's 1.3% first quarter gain. At the end of 2013, Berkshire reported that its book value per share had grown at a slower rate than the S&P 500 in the five years since the financial crisis.
Berkshire fell less than 1% in Friday trading, closing at $192,255.00.
"People are going to want reinforcement on Warrren's positive view of the United States economy," Bill Smead, chief investment officer of Smead Capital Management, said of expectations for Berkshire's annual meeting, in a telephone interview prior to earnings.
Smead also said he will be paying attention to Buffett's message on how Berkshire plans to allocate a growing swell of cash among Berkshire's operating subsidiaries, or through new investments or acquisitions. He expects Buffett, once more, will use Berkshire's annual meeting to advertise that the conglomerate is interested in cutting deals in 2014.
Here's what analysts had to say prior to the earnings report:
Barclays analyst Jay Gelb (Overweight, $223,500.00 PT per Class A share, $149 PT per Class B share)
"We expect Berkshire shares to benefit from attractive growth in both book value per share and earnings, driven by its insurance and non-insurance businesses. Berkshire's business mix has shifted over time, with Insurance becoming a smaller portion of the company. Growth areas include Utilities and Energy (including the NVE acquisition) and the Manufacturing, Service, and Retail unit (helped by bolt-on acquisitions), as well as the Burlington Northern railroad (acquired in 2010).
In fact, the percentage contribution to operating earnings from Berkshire's non-insurance businesses increased to 66% in 2013 up from 43% in 2006. In 2013 Berkshire's five largest non-insurance businesses generated record profits of $11bn, up from $10bn in 2012 and $9bn in 2011; the company expects to report stronger earnings again in 2014.
BRK shares are attractively valued currently at 1.41x book value, which is near the level (1.2x book value) at which the company will repurchase stock. The buyback plan provides a support level and signals how strongly Mr. Buffett believes Berkshire's intrinsic value exceeds its book value. We raise our price target to $149 price target ($223,500 per Class A share). This valuation implies a multiple of 1.4x (near the avg historical multiple since 2008) year-end 2015E book value per Class B share of $109 ($163,500 per Class A share) from $144 (1.3x our prior YE15E book value)."
Nomura analyst Clifford Gallant (Buy, $199,000.00 PT per Class A share)
"We are expecting operating EPS of $2,242 and book value up 1.7% since 12/31/13 to $137,215. Among the highlights, we expect GEICO to show 8% premium growth with a 94.5% combined ratio as the best operating model in the business continues to gain share. In reinsurance, we expect a good quarter as peers have reported low catastrophe quarters. We expect BNSF to report operating earnings growth of approximately 8% as demand for rail transport continues to surge in the U.S. The manufacturing and service businesses should report double-digit earnings growth, and we expect to see a full quarter of Heinz.
As was the case last year, we expect succession will be a popular topic with various angles on the issue to be asked. The investment roles appear to be successfully filled by Mr. Combs and Mr. Weschler, and we view there to be several strong operating CEO candidates, including Mr. Matt Rose, Mr. Ajit Jain, and Mr. Greg Abel. We would also stress that as the company grows and buys in 100% interests of strong earnings and cash flow producers, we increasingly see the future value of Berkshire dependent upon the success of those businesses and not the ability of senior management to pick stocks.
We look forward to updates on GEICO and its interest in telematics. Also, we are looking forward to an update on the expansion into commercial insurance by National Indemnity. Previously, the CEO has suggested that the growth in float will likely slow, thus we look for an update on that viewpoint."
KBW analyst Meyer Shields (Market Perform, $180,599.00 PT per Class A share)
"Another year, another missing invitation to Omaha. While we can't know for sure, we presume our exclusion from the panel from which Warren Buffett and Charlie Munger select analysts to ask questions at Berkshire Hathaway's annual meeting has something to do with our occasionally critical analysis.
We have some operational questions, of course, but more important, we caution investors to consider whether this apparent message control limits their understanding of a company whose disclosure isn't, in our opinion, keeping up with its $300 billion market cap size. This is especially important in light of succession concerns that surround the stock."
-- Written by Antoine Gara in New York.