Profits at Warren Buffett’s firm reach $36B as stocks surge and its insurance holdings perform well

Profits rebounded at Warren Buffett’s conglomerate along with the value of its $353 billion stock portfolio in the second quarter to hit $35.9 billion, and many of Berkshire Hathaway’s assorted businesses also performed well, led by strong results in its core insurance businesses, particularly Geico.

Berkshire Hathaway said Saturday that its profits surged to hit $24,755 per Class A share. A year ago, the Omaha, Nebraska-based company recorded a loss of $43.6 billion, or $29,633 per Class A share, when the value of its biggest investments fell.

But Buffett has long said that those bottom-line figures can be misleading because of the big swings in the paper value of its investments from quarter to quarter when few of Berkshire’s investments are actually bought or sold. Instead, Buffett recommends that investors focus on operating earnings to see how the more than 90 companies Berkshire owns are actually performing.

By that measure, Berkshire’s operating earnings grew 6.6%, to $10.043 billion, or $6,928.40 per Class A share. That’s up from $9.417 billion, or $6,403.61 per Class A share, a year ago.

The three analysts surveyed by FactSet Research expected Berkshire to report operating earnings of $5,575.67 per Class A share.

Berkshire’s revenue jumped to $92.5 billion from last year’s $76.2 billion thanks largely to the addition of truck stop operator Pilot Travel Centers, which generated $14.75 billion in revenue during the quarter. Berkshire’s results were also helped by last fall’s acquisition of the Alleghany insurance conglomerate.

CFRA Research analyst Cathy Seifert said Berkshire will have a hard time keeping up that level of growth without additional acquisitions, which Buffett seems reluctant to make at current prices.

“I think the question that should be or will be on investors’ minds is, ‘How do you sustain this level of growth when many of your underlying businesses are not putting up this level of growth?’” Seifert said.

Underwriting profits at Geico rebounded to $514 million as it raised premiums on its auto insurance customers by an average of 16% and continued to cut back on its ubiquitous lizard ads while paying out fewer claims. A year ago, Geico reported a $487 million pretax underwriting loss. The number of policies Geico wrote also fell by 14%

Profits fell at Berkshire’s BNSF railroad to $1.26 billion from last year’s $1.66 billion as it carried 11% fewer shipments in the quarter, suggesting the economy continued to slow. Rising interest rates also hurt Berkshire’s housing-related businesses such as manufactured home building Clayton Homes and its Berkshire Hathaway Home Services network of Realtors.

But Berkshire also benefitted from interest rates that helped it generate more money on its cash. Berkshire is still sitting on a mountain of cash because it hasn’t completed any major acquisitions or made many significant new stock investments this year. The company’s cash pile grew to $147.4 billion from the first quarter’s $130.6 billion.

“Buffett is carrying way more cash than he would be if he saw bargains all over the place,” said investment manager Bill Smead, of Smead Capital Management.

Edward Jones analyst Jim Shanahan said it appeared that Berkshire was a net seller of about $8 billion in stocks during the quarter with most of that likely being Buffett’s previously disclosed decision to unload most of Berkshire’s Activision Blizzard stake. The current high prices of stocks, combined with weakness in the economy and rising interest rates, might combine to keep Buffett mostly on the sidelines and unlikely to make any major deals in the near future.

“I’m kind of thinking that in this environment, we shouldn’t expect to see a whole lot out of Berkshire in the second half of the year,” Shanahan said.

Berkshire did repurchase $1.4 billion of its own stock in the quarter, but the pace of its buybacks slowed considerably from the first quarter, when it bought $4.4 billion of Berkshire shares. Buffett tries not to do many buybacks when he believes Berkshire’s shares might be overpriced.

A recent change in the way Berkshire accounts for its ownership of more than 25% of Occidental Petroleum also helped boost its second quarter earnings. Berkshire said its ownership of Occidental, combined with its 26.5% stake in Kraft Heinz, added $535 million to its bottom line. A year ago, those investments would have added only about $182 million to Berkshire’s profits.

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