Berkshire Hathaway Earnings Prove Warren Buffett Has Still Got It

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Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B) posted strong third-quarter results at the end of last week, and that should be enough to allow BRK.B to resume its rightful place as a five-year market-beater.

warren buffett berkshire hathaway stocksWarren Buffett’s own toughest test for Berkshire Hathaway is that for any trailing five-year period, BRK.B must outperform the S&P 500 on a total return basis.

Warren Buffett had cleared that hurdle every year since he took over managing Berkshire Hathaway in 1965 — until last year.

Never mind that Berkshire Hathaway’s vast investment portfolio is invested in lower risk value stocks, and is therefore expected to underperform the broader market when it goes on an unusually hot run. From 2008 to 2013, BRK.B generated a return of 64%, but the S&P 500 churned out more than 90%.

Well, after third-quarter results and BRK.B’s year-to-date performance, there’s little doubt that Warren Buffett has still got it.

For the most recent quarter, Berkshire Hathaway’s net profit declined 9% to $4.6 billion, or $2,811 per Class A share, compared with $5 billion, or $3,074 per share, a year earlier.

A drop in earnings might sound bad, but it was driven by unusually good investment returns a year ago, when Berkshire Hathaway cashed in on a number of loans in made during the financial crisis, including investments in General Electric (GE), Goldman Sachs (GS), and privately held Mars and Wrigley.

Berkshire Hathaway Chugs Along

More importantly, on an operating basis — Warren Buffett’s preferred way to measure profit at Berkshire Hathaway — profit rose to $4.7 billion, or $2,876 per Class A share, from $3.7 billion, or $2,228 per Class A share last year.

Furthermore, Berkshire Hathaway saw its book share — a proxy for all-important intrinsic value — rise more than 7%.

Berkshire Hathaway’s railroad — Burlington Northern Santa Fe — proved once again to be a good bet on an expanding U.S. economy. Income rose to $1.04 billion from $989 million a year ago.

At the same time, Berkshire Hathaway’s bread-and-butter insurance businesses kept delivering, as total earned premiums grew 37% during the third quarter. The energy, manufacturing, retail and finance business likewise contributed to growth.

In a rare misstep, Berkshire Hathaway took an impairment charge of $678 million related to a bad investment in Tesco, a British supermarket operator. Warren Buffett last month called the Tesco investment a “huge mistake.”

Lastly, we can’t talk about Berkshire Hathaway without mentioning its pile of cash. The company ended the quarter with more than $60 billion in cash on its books. Warren Buffett likes to keep $20 billion sitting around as insurance for the insurance businesses. That left more than $40 billion for acquisitions.

The bottom line is that BRK.B is back to crushing the broader market — both this year and over the last five years. For the year-to-date, Berkshire Hathaway stock is up 21% vs. a 10% gain for the S&P 500. Over the last five years, BRK.B is beating the broader market by 30 percentage points.

Warren Buffett may have stumbled last year, but with two months left in 2014, it’s clear he hasn’t lost a step.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/11/berkshire-hathaway-earnings-warren-buffett/.

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