By Jonathan Stempel
– Warren Buffett’s Berkshire Hathaway Inc posted a $2.69 billion loss in the third quarter on Saturday, as rising inflation, falling equity investment and a big loss from Hurricane Ian offset the improvement in many of the conglomerate’s businesses.
Operating income nevertheless increased by 20%, exceeding analysts’ forecasts.
Berkshire benefited from higher demand and prices from new home sales, industrial products and energy, while the US Federal Reserve’s inflation-fighting campaign helped Berkshire generate more income from insurance investments.
“Overall, results were strong and showed resilience given the impact of inflation, rising interest rates and supply chain challenges,” Jim said. Shanahan, an Edward Jones & Co analyst with a “buy” rating on Berkshire.
Buffett’s company took advantage of the stock market decline to add more stocks to its $306 billion portfolio, buying a net $3.7 billion and building a 20.9% stake in Occidental Petroleum Corp.
Berkshire also repurchased more of its own shares, but was cautious, repurchasing $1.05 billion, similar to the second quarter. He also repurchased shares in October.
The conservatism may reflect the “significant disruptions” Berkshire said its several dozen companies are still seeing supply chains and events beyond their control, such as the covid-19 pandemic and Russian-Ukrainian conflict.
Berkshire also said rising fuel and accident costs hurt the respective results of two of its best-known companies, the BNSF railroad and car insurer Geico.
Cathy Seifert, a CFRA The research analyst with a “hold” rating for Berkshire, said the company could be “at an inflection point, much like the economy”, where it will need to contain costs to prepare for the downturn in the demand and a possible recession.
“At the end of the day, it was a healthy quarter, but there are concerns about its trajectory over the next 12 months,” Seifert said.
Quarterly net loss was $1,832 per Class A share, compared with earnings of $10.34 billion, or $6,882 per share, a year earlier.
The results included $10.45 billion in investment and derivatives losses as the stock prices of many large Berkshire investments other than Apple Inc fell.
Accounting rules require Berkshire to report these changes even if it does not buy or sell anything. This causes large quarterly fluctuations in results that Buffett says are generally meaningless.
Operating profit, meanwhile, rose to $7.76 billion, or about $5,294 per Class A share, from $6.47 billion, or $4,331 per share, a year earlier. .
Results improved despite a $2.7 billion after-tax loss caused by Ian, a powerful Category 4 hurricane that hit Florida on September 28. Revenues increased by 9%, while expenses increased by 7%.
“The concern is which of the growing expenses is going to become more permanent,” said Tom Russo, a partner at Gardner, Russo & Quinn in Lancaster, Pa., which invests more than $1 billion in Berkshire.
Russo said the results reflect “a company that hides and conserves resources while waiting for big ‘elephants,'” a term Buffett uses to describe big acquisitions.
Berkshire ended September with $109 billion in cash, down from $105.4 billion in June, despite spending $11.6 billion last month to buy the Alleghany Corp insurance business.
The strengthening U.S. dollar generated $858 million in third-quarter gains from Berkshire’s non-dollar-denominated debt.
Meanwhile, the Fed’s aggressive hike in short-term interest rates fueled a 21% increase in income from insurance investments, with income from US Treasuries and other debt nearly tripling to $397 million.
Benefit to BNSF fell 6% as spending jumped by a third, including increases of 27% for allowances and 80% for fuel, some of which was passed on to customers through surcharges.
Geico suffered its fifth straight quarterly underwriting loss, losing $759 million before tax, reflecting more frequent and costly accident claims, rising used-car prices and auto parts shortages. Premiums issued have barely changed.
Seifert said Geico, led by Berkshire portfolio manager Todd Combs, underperformed many other auto insurers and could suffer further underwriting erosion if its “limited revenue growth and cost inflation claims” persist.
The declines were offset by a 6% rise in profits at Berkshire Hathaway Energy and 20% at manufacturing, services and retail companies, including Clayton Homes, although rising mortgage rates will likely reduce sales future homes.
Berkshire also said the rate hike could significantly reduce any reduction in equity resulting from an upcoming accounting change for certain insurance contracts.
Buffett, 92, has run Berkshire since 1965.
Investors watch Berkshire closely because of its reputation and because results often reflect broader economic trends.
The company also owns well-known consumer brands such as Dairy Queen, Duracell, Fruit of the Loom and See’s Candies.