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Berkshire Hathaway's Operating Earnings Soar in the First Quarter

By Jordan Wathen - Updated May 6, 2018 at 10:01AM

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Earnings from its operating companies exploded higher, though losses on its investment portfolio resulted in a net loss in the first quarter.

Berkshire Hathaway (BRK.A -0.48%) (BRK.B -0.65%) reported that operating earnings increased 49% year over year to $5.3 billion in the first quarter of 2018. The Omaha-based holding company reported that its insurers, railroad, and manufacturing subsidiaries all earned higher profits, though losses in its investment portfolio weighed on its net income.

Here's a breakdown of the company's first quarter earnings report, segment by segment.

The manufacturing, service, and retailing segment earned $1.8 billion (up 38%)

Berkshire's manufacturing, service, and retailing businesses include everything from Precision Castparts to Dairy Queen and See's Candies. These mostly American-based businesses that Berkshire has acquired over the years are now its single-largest profit driver.

The industrial businesses remain the key earnings driver in this segment. Revenue at Precision Castparts, one of its biggest industrial manufacturing businesses, increased by 6% compared to the year-ago period, due to increased demand for its aerospace products. The company said that pre-tax profit declined, however, due to costs and lost earnings related to an unexpected plant shut down.

Berkshire said that Lubrizol's pre-tax earnings increased by 19% in the first quarter, adjusted for a loss it incurred in the first quarter of 2017 related to a goodwill writedown. It wrote in its quarterly report that IMC's "pre-tax earnings increased significantly" due to increased sales, manufacturing efficiencies, and business acquisitions.

U.S. currency in a glass jar.

Image source: Getty Images.

The insurers earned $1.4 billion (up 121%)

Berkshire breaks out its insurance companies' earnings by source, separating earnings from underwriting from profits earned from the insurance companies' vast investment portfolios. 

Combined, Berkshire's insurance companies earned $407 million in profit from underwriting in the first quarter compared to a $267 million loss last year. In its quarterly report, Berkshire wrote that GEICO and BH Primary Group were both profitable during the quarter, though its reinsurance segment posted a small loss.

GEICO was the standout star thanks to lower estimated losses stemming from events in prior years. Berkshire said that GEICO's pre-tax earnings were buoyed by a $407 million reduction in estimated losses in prior-year periods, which accounted for approximately 60% of its pre-tax earnings in the first quarter.

Investment income jumped 11% year over year to more than $1 billion, as insurance float increased by roughly 10% to $116 billion at the end of the quarter.

Railroad earnings soared to $1.1 billion (up 37%)

We knew ahead of Berkshire's earnings report that BNSF was going to have a good quarter in terms of volume, but pricing mix was the question mark. As it turned out, pricing and volume were on BNSF's side. 

Berkshire reported that BNSF saw a 1.8% increase in revenue per carload and a 5.1% increase in total volume, driving pre-tax profits up 12% compared to the year-ago period.

In its quarterly report, Berkshire said that it expected "most volume growth over the remainder of the year," which bodes well for the railroad's fortunes in 2018. Railroads generally benefit from higher commodity prices, which lead to increased production and need for transportation. 

Utilities and energy earnings rose to $585 million (up 17%)

Berkshire's energy businesses are a reliable profit generator, as they make their money supplying power in regulated markets. Berkshire reported that the utilities and energy segment earned $585 million in net earnings, with the bulk of the increase driven by lower income taxes.

Lower taxes are unlikely to benefit the utility businesses over the long haul, however. The company explained that it expects to pass on the benefit of lower taxes in the form of lower prices over time. Rates for electricity are generally set by local regulators with the goal of allowing a utility to earn a certain after-tax return on capital.

Finance and financial products earned $374 million (up 23%)

This collection of businesses includes everything from Clayton Homes to equipment financing businesses including UTLX and XTRA. Profits from these businesses grew 23% compared to the prior-year period, helped by a declining tax rate and a modest 10% increase in pre-tax profit.

Clayton Homes is benefiting from tailwinds in housing construction. Revenue from manufactured housing and financing increased 16% year over year, and pre-tax earnings increased about 11% compared to the year-ago period. Buffett explained in his letter to shareholders this year that Clayton Homes is getting involved in other types of housing construction, including site-built homes.

Investment losses of $6.4 billion erased all operating earnings

An accounting change now requires Berkshire to record mark-to-market swings in its investment portfolio in its quarterly results. This quarter, the company recorded $6.4 billion of losses due to its investments and derivatives. Virtually all of that loss was due to a decline in the value of publicly traded stocks it owns. 

Of course, neither Buffett nor long-term Berkshire shareholders put much weight on the ups and downs in the investment portfolio over short periods of time. Given that Berkshire's stock portfolio was worth nearly $173 billion at the end of the quarter, a single-digit percentage change in the value of its public stock portfolio can have a massive impact on reported earnings from quarter to quarter.

It's safe to say that going forward, Berkshire will likely report large losses when stocks drop, and large profits when stocks rise, but what really matters are the returns over the long haul. And as far as long-term returns go, there are very few investors that have a long-term record even half as good as Berkshire Hathaway's. 

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