Marginal Performance at Berkshire Hathaway

Margins matter. The more Berkshire Hathaway (NYSE: BRK-B  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Berkshire Hathaway’s competitive position could be.

Here's the current margin snapshot for Berkshire Hathaway and some of its sector and industry peers and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Berkshire Hathaway

22.5%

15.9%

10.9%

 ACE (NYSE: ACE  )

35.9%

23.5%

18.4%

 Axis Capital Holdings (NYSE: AXS  )

33.4%

19.9%

18.1%

 Chubb (NYSE: CB  )

26.6%

22.6%

17.6%

 Travelers (NYSE: TRV  )

34.3%

20.6%

14.1%

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that chart doesn't tell us much about where Berkshire Hathaway has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months (TTM), the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Berkshire Hathaway over the past few years.

(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 23.2% and averaged 20.1%. Operating margin peaked at 17.2% and averaged 13.4%. Net margin peaked at 11.2% and averaged 8.9%.
  • Fiscal year 2009 gross margin was 17.6%, 250 basis points worse than the five-year average. Fiscal year 2009 operating margin was 10.4%, 300 basis points worse than the five-year average. Fiscal year 2009 net margin was 7.2%, 170 basis points worse than the five-year average.
  • TTM gross margin is 22.5%, 240 basis points better than the five-year average. TTM operating margin is 15.9%, 250 basis points better than the five-year average. TTM net margin is 10.9%, 200 basis points better than the five-year average.
  • LFQ gross margin is 21.9%, 2,420 basis points better than the prior-year quarter. LFQ operating margin is 16.1%, 2,710 basis points better than the prior-year quarter. LFQ net margin is 11.3%, 1,800 basis points better than the prior-year quarter.

With recent 12-month-period operating margins below historical averages, Berkshire Hathaway has some work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. By keeping an eye on the health of your companies' margins, you can spot potential trouble early, or figure out whether the numbers merit Mr. Market's enthusiasm or pessimism. Let us know what you think of the health of the margins at Berkshire Hathaway in the comments box below. Or, if you're itching to learn more, head on over to our quotes page to view the filings directly.

Seth Jayson owned shares of Berkshire Hathaway at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 15, 2010, at 2:14 AM, fatboy48 wrote:

    I wasn’t even going to respond to the article but I have read from “The Motley Fool” more stupidity. I just had to write and let the rest of the world know that about you fellows that write for this for this web page, that you motivate more on the amusement side than the education part of The Motley Fool mission statement. The article Marginal Performance at Berkshire Hathaway is misleading and its only value is for amusement. I do not have the hard and exact figures to offer up for evidence, however I will offer up something that the analysts like the ones that write for the comedy relief group Motley Fool has failed to cite.

    The country has just came out of a recession that most other companies have experienced 25 % lost of revenue and operating income, would you not agree following the simple logic that if Berkshire was held to the standard that you apply to the rest of the business world. You would agree considering that everyone is 24% down and Berkshire has had 24% increase in TTM Gross Margin would you not agree that Berkshire has outperformed all other by 48%.

    I wish the writers for the fool would not have to prove have foolish they really are so much of the time.

    All of you reading this posting remember; the fatboy said this, If you want to ride on the fast tracks to profits you need to get on board while the Buffet man will let you.

    Cause this train is about to leave the station and baby its going to be a highball ride.

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