Berkshire Hathaway's 4Q net income up 43 percent

AP News
Posted: Feb 26, 2011 1:21 PM
Berkshire Hathaway's 4Q net income up 43 percent

Warren Buffett's Berkshire Hathaway reported a 43 percent jump in fourth-quarter earnings Saturday largely because of strong performance at its railroad business and a paper gain of $1.4 billion on the company's derivative contracts and investments.

Buffett said in his annual letter to shareholders that the purchase of the Burlington Northern Santa Fe railroad was Berkshire's highlight of 2010.

Berkshire reported net income of $4.38 billion, or $2,656 per share of its primary, Class A stock, which carries more voting power than Class B shares. That's up from the $3.1 billion net income, or $1,969 per Class A share, a year ago. It's also higher than the $1,695 per Class A share expected by analysts surveyed by FactSet.

Revenue grew nearly 20 percent to $36.2 billion from $30.2 billion a year earlier.

Glenn Tongue, a managing partner at T2Partners investment firm, called Berkshire's results spectacular because nearly all the company's businesses recovered.

"I could not spot any weakness in the earnings," Tongue said.

Buffett said Berkshire's $26.7 billion acquisition of BNSF last February is working out better than he expected. The railroad added $2.2 billion to Berkshire's net income in 2010.

Buffett said he estimates that Berkshire's earnings power grew by more than 30 percent because of the railroad, so Berkshire can generate about $12 billion in after-tax earnings in a year with a decent economy and without a major catastrophe for Berkshire's insurance businesses to cover.

Berkshire's insurance division, which includes Geico and General Reinsurance, performed well in 2010. Berkshire's insurance underwriting profit grew 37 percent, to $1.3 billion in 2010 from the previous year's $949 million.

Most of Berkshire's manufacturing, service and retail businesses also improved in 2010 and contributed $2.5 billion to net income.

Several of Berkshire's subsidiaries are particularly sensitive to the housing market, such as Acme Brick, Shaw Carpet, and Johns Manville. So those businesses have been slow to improve, but Buffett predicted the U.S. housing market will begin to recover within the next year.

Buffett's letter detailed how the acquisition of BNSF, better results at Berkshire's other subsidiaries and strong investment performance combined to boost the Omaha, Neb.-based company's net income by 61 percent to $12.97 billion, or $7,928 per Class A share, in 2010 from the previous year's $8.1 billion, or $5,193 per share. Revenue for the full year was $136.2 billion, up 21 percent from $112.5 billion a year earlier.

During the fourth quarter, Berkshire recorded a largely unrealized gain of $1.4 billion on its derivatives and investments. In the previous year Berkshire's investments and derivatives added $1.03 billion to its fourth-quarter earnings. Derivatives are complex investments that have been blamed in part for the 2008 financial crisis and the recession.

Buffett defended Berkshire's 203 derivatives in the letter and tried to make the case that those long-term contracts will ultimately be profitable. He reiterated that Berkshire's derivatives operate like insurance policies, with some covering the risk of bond defaults by certain companies and some covering whether certain stock market indexes will be lower 15 or 20 years in the future.

Buffett said Berkshire received $3.4 billion in premiums for the credit default derivatives and paid $2.5 billion in losses during the financial crisis, but most of the higher-risk contracts have expired.

"In short, we charged the right premium, and that protected us when business conditions turned terrible three years ago," Buffett said.

Berkshire received premiums of $4.2 billion for its 39 remaining equity derivatives. Buffett said that if those contracts had expired at the end of 2010, Berkshire would have owed $3.8 billion and made a profit.

Buffett said he expects stock prices to grow before the equity derivatives expire several years from now. Because those 39 derivatives are tied to certain stock market indexes, he said Berkshire is likely to record a significant gain. Plus, Berkshire is able to invest the premiums until the contracts expire.

Buffett also reminded investors that Berkshire has little chance of matching its past stellar performance because the company is so large.

Buffett still strives to beat the returns of the S&P 500 index each year, but he said there is no chance of exceptional performance because Berkshire has investments of stock, cash and bonds worth $158 billion.

Buffett's preferred measure of Berkshire's performance is the growth in its book value, which is a calculation of the company's assets minus its liabilities. Buffett said Berkshire's book value grew 13 percent to $95,453 in 2010. The S&P 500, which Berkshire joined last year, gained 15.1 percent last year when dividends were factored in.

Buffett said he's looking for more big acquisitions to boost Berkshire's earnings power.

Berkshire owns roughly 80 subsidiaries, including clothing, furniture, jewelry and corporate jet firms, but its insurance and utility businesses typically account for more than half of the company's net income. It also has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co.