Berkshire posts record operating profit

(Reuters) — Berkshire Hathaway on Saturday posted its highest-ever quarterly operating profit, while gains from stock holdings helped the conglomerate led by billionaire Warren Buffett swing to a nearly $36 billion overall profit.

Rising interest rates and better results at its Geico unit allowed Berkshire’s insurance businesses to generate more money in the second quarter, with profit up 38% and interest and other investment income growing sixfold.

But while operating profit topped $10 billion, those same rising rates have made it more costly to buy and upgrade homes, hurting results at Berkshire’s Clayton Homes and building products businesses.

Profit fell at one of Berkshire’s largest businesses, the BNSF railroad, with a 24% decline reflecting lower shipments of consumer goods, price competition from truckers, and higher pay for employees.

Berkshire also appeared to remain wary of high stock prices as U.S. equities extended their rally.

During the second quarter it sold $8 billion more in stocks than it bought and repurchased less of its own stock, and it ended June with a near-record $147.4 billion of cash.

“The story here is interest rates, and valuations of stocks,” said Jim Shanahan, an Edward Jones analyst with a “buy” rating on Berkshire.

“The earnings impact of higher interest rates on investment income is offsetting the economic softness caused by those same rates,” he added. “And it’s clear there aren’t a lot of attractive investment opportunities out there.”

Investors closely watch Berkshire because of Buffett’s reputation, and because results from the Omaha, Nebraska-based company’s operating units often mirror broader economic trends.

Those units also include Berkshire’s namesake energy company, several industrial companies, and familiar brands such as Dairy Queen, Duracell, Fruit of the Loom and See’s Candies.

Quarterly operating profit rose 7% to $10.04 billion, or about $6,938 per Class A share, from $9.42 billion a year earlier.

Operating results reflected recent purchases of Alleghany, whose businesses include various insurers and the Pilot truck stop operator, which added $114 million of profit.

Net income totaled $35.91 billion, or $24,775 per Class A share, compared with a year-earlier $43.62 billion loss.

Year-earlier results reflected an accounting change for some insurance contracts.

Berkshire repurchased $1.4 billion of stock in the quarter, down from $4.4 billion from January to March.

It also sold $12.6 billion of stocks, while buying just $4.6 billion. Apple comprised about half of Berkshire’s $353 billion equity portfolio.

“They’re not loving valuations,” said Cathy Seifert, a CFRA Research analyst with a “hold” rating on Berkshire.

“The quarter was strong, but organic growth trends are not that robust,” Ms. Seifert added. “The question that will be on investors’ minds is how to position the company for strong growth without more frequent acquisitions.”

Geico posted a $514 million pre-tax underwriting profit, its second straight profitable quarter after six quarters of losses, as higher average premiums, fewer accidents and less ad spending offset a decline in policies in force.

Overall profit from Berkshire Hathaway Energy, in which Berkshire has a 92% stake, was little changed at $785 million.

But the company said it faces a potential of $1.02 billion in pre-tax losses, or $608 million not covered by insurance, at its PacifiCorp electric utility unit tied to a series of Oregon wildfires in 2020.

An Oregon jury in June found PacifiCorp liable to homeowners for negligence after failing to shut down power lines that caused four fires. PacifiCorp plans an appeal.