Berkshire posts record operating profit, $35.9 billion of net income

By Jonathan Stempel

(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, as well as a rebound in performance at the Geico car insurer, allowed Berkshire’s insurance businesses to generate more money, with profit up 38% from a year earlier.

But those same rising interest rates have made it more costly to buy and renovate homes, hurting results at the Clayton Homes mobile home and building products businesses, and causing revenue at the RV unit Forest River to sink 34%.

The BNSF railroad, one of Berkshire’s largest businesses, saw profit drop 24%, hurt by lower shipments of consumer goods, price competition from truckers, and higher pay for employees.

Investors closely watch Berkshire because of Buffett’s reputation, and because results from the Omaha, Nebraska-based company’s dozens of 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 topped $10 billion for the first time but grew just 7%, in part from recent purchases of the Alleghany (NYSE:) insurer and Pilot truck stop operator.

WARY OF VALUATIONS

And while Berkshire repurchased $1.4 billion of stock in the quarter, it remained a big net seller of stocks from its $353 billion equity portfolio – about half of which is Apple (NASDAQ:) – shedding about $8 billion more stocks than it bought.

Berkshire ended June with a near-record $147.4 billion of cash.

“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,” Seifert added. “The question that will be on investors’ minds is how to position the company for strong growth without more frequent acquisitions.”

Second-quarter operating profit rose to $10.04 billion, or about $6,938 per Class A share, from $9.42 billion a year earlier.

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.

Current results included $25.9 billion of largely unrealized gains from investments and derivatives.

Those results are volatile because accounting rules require Berkshire to report unrealized gains even if it sells nothing. Buffett urges investors to ignore the fluctuations.

The quarter was the first to fully include results from Pilot, in which Berkshire now owns an 80% stake. Pilot added $114 million to operating profit.

Results also included profit attributable to Berkshire’s 25.3% stake in Occidental Petroleum (NYSE:).

Berkshire also owns $8.8 billion of Occidental preferred stock, which throws off an 8% dividend, though the oil company has been redeeming some of the original $10 billion it issued.

WILDFIRE LOSSES

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 (NYSE:) Energy, in which Berkshire has a 92% stake, was little changed at $785 million.

But the company said its PacifiCorp electric utility unit could suffer $1.02 billion of pre-tax losses, or $608 million not covered by insurance, tied to 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 there. PacifiCorp plans an appeal.

Buffett turns 93 on August 30. He is worth $117.5 billion and the world’s sixth-richest person, Forbes magazine said.

Berkshire Class A shares closed Friday at $533,600, about 2% below their record high. The shares are up 14% this year, while the is up 17%.