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Berkshire Hathaway Earnings: Second Quarter 2011
Holding company Berkshire Hathaway (BRKB) has released excellent results for the June quarter. Revenues soared more than 20%, fueled by the company's insurance operations and railroad/utilities businesses (discussed below). Significant investment gains also bolstered results. In all, Berkshire posted share earnings of $1.38, well ahead of our $0.90 estimate and more than 70% higher than the year-earlier tally. In response, we now look for 2011 share earnings of $4.50, $0.50 better than our previous estimate. Our 2012 share-net call of $5.10 remains unchanged.
Berkshire Hathaway owns a number of large insurance businesses, and these companies performed very well during the June quarter. Insurance premiums earned increased 30% on a year-over-year basis. The Reinsurance Group experienced hefty demand for its products, while GEICO continued to impress. The auto insurer picked up additional market share, as it continued to benefit from a huge advertising budget, as well as the ability to often offer lower car insurance rates than some of the competition. GEICO also experienced elevated retention rates, as existing customers renewed policies at an improved clip.
The company benefited significantly from its railroad operations. More than a year ago, Berkshire purchased Burlington Northern Santa Fe. It operates more than 32,000 miles of track connecting the Midwest, the Pacific Northwest, Canada, and the Gulf of Mexico, and derives the bulk of its revenues from transporting consumer goods, industrial products, coal, and agriculture products. Although the United States economy has not fared too well of late, Burlington's June-quarter revenues jumped 17%, year over year, and operating earnings advanced 14%. In all, it was an excellent quarter for Berkshire, but due to the ongoing macroeconomic concerns and debt issues domestically and abroad, the good earnings news was unable to lift the stock; Berkshire shares have fallen along with the overall market of late.
Looking ahead, we continue to like Berkshire's long-term prospects. It owns dozens of profitable businesses that ought to perform well over the next several years. Furthermore, the company will likely remain active on the acquisition front. It is currently in the process of acquiring Lubrizol, a producer of chemicals for pharmaceutical companies, fuel additives for gasoline and diesel, and other ingredients for the transportation industry. We like this deal for Berkshire, since Lubrizol remains a market leader for several applications and generates healthy earnings and cash flow. Also, Berkshire's subsidiary National Indemnity recently announced that it made a tender offer for reinsurer Transatlantic Holdings. This addition would bolster Berkshire's already vast reinsurance operations. That said, Transatlantic has now received multiple bids, and its board of directors is currently reviewing the company's options. For now, Berkshire's offer of $52.00 a share in cash for all of Transatlantic stock is the most lucrative, and we expect the board to accept this proposal. The deal values Transatlantic at $3.25 billion.
In sum, Berkshire performed very well in the June quarter, and we continue to think that this stock would make a good investment for buy-and-hold accounts.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.