Berkshire Profit Hits a Record as Buffett’s Cash Pile Grows

(Bloomberg) -- Berkshire Hathaway Inc.'s operating profit jumped 14% to a record as Warren Buffett's conglomerate saw gains from its railroad and got some long-awaited earnings from Kraft Heinz Co.

Operating earnings climbed to $7.86 billion in the third quarter, thanks in part to a rise in investment income and Berkshire's reinsurance group posting its first underwriting profit of the year despite losses from a Japanese typhoon. Revenue climbed 2.4% on increases from the company's insurers and manufacturing businesses.

The results pushed Buffett's cash pile to a record $128 billion, even as he completed a $10 billion investment in Occidental Petroleum Corp., his chunkiest purchase in more than year. Aside from that deal, Buffett was a net seller of stocks in the quarter and bought back less of Berkshire's own shares than some analysts expected, raising more questions over how long the legendary investor will wait to use his dry powder.

“It's an obscene amount of cash,” Jim Shanahan, an analyst at Edward Jones, said in an interview. Still, operating results were “really strong,” he said. “This is a pretty good print.”

The fact that Buffett's sprawling businesses are spitting out cash faster than he can find good places to invest it is a problem many companies would envy. But there are signs that the idle funds are weighing on growth, and Berkshire's stock is on track for its worst underperformance since 2009. The company's Class A shares gained 5.7% this year through Friday's close, short of the 22% climb in the S&P 500 Index during that time.

Read more: Buffett's underperformance has investors split

Berkshire recorded $467 million in gains related to its share of Kraft Heinz's profit in the first nine months of 2019. The gains came all at once after the stake left a blank spot in Berkshire's results for two quarters as the packaged food giant delayed reporting results amid regulatory probes.

Buffett has been stung by Kraft Heinz's stumbles over the past year. After Kraft Heinz announced a $15.4 billion writedown in February, Berkshire said it would take a $2.7 billion charge on its stake. Kraft Heinz released first-half results in August and was back on track in October, when it reported third-quarter profit that beat analyst estimates. That sent shares climbing to their highest level since May, though they're still well below Berkshire's carrying value. Berkshire said Saturday it didn't believe an impairment charge was necessary at this time.

Stock Buybacks

Buffett's railroad was able to open up all key routes in the third quarter that had been impacted by flooding. The 5% profit gain at Berkshire's railroad, BNSF, also benefited from higher rates on shipments even as volumes fell.

Berkshire's $700 million of repurchases in the quarter was a nearly 75% increase from the amount of stock the company bought back in the second quarter. Still, third-quarter buybacks fell short of Berkshire's record repurchase of $1.7 billion stock in the first quarter and was lower than the $900 million estimated by analysts at UBS Group AG.

While Buffett received more flexibility to buy back shares last year, his repurchases have been modest compared to other giant companies, especially financial firms. Bank of America Corp., which counts Berkshire among its largest shareholders, said in June that it planned to repurchase more than $30 billion of its stock over the next year.

More key figures from the results:

• Pretax earnings from Berkshire's group of manufacturers, which includes Precision Castparts Corp. and Marmon, jumped 4.9% in the third quarter. That was boosted by gains at Precision due to demand for aerospace products and increases at Clayton Homes, which manufactures mobile homes and has been expanding into site-built construction.
• Net earnings slipped 11% to $16.5 billion. Under new accounting rules, Berkshire has to report swings in its investment portfolio in its net income figures. The unrealized gains during the third quarter were about $8 billion compared to a gain of $10.2 billion in the same period a year earlier.

To contact the reporter on this story: Katherine Chiglinsky in New York at kchiglinsky@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Ian Fisher

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