Berkshire profit drops, operating results gain

Warren Buffett's Berkshire Hathaway Inc said on Friday third-quarter profit fell nine per cent as it took a large writeoff on one of its investments, but operating results easily topped forecasts on improvement in its insurance, energy and railroad operations.

Net income slipped to $4.62 billion, or $2,811 per Class A share in the third quarter, from $5.05 billion, or $3,074 per Class A share, a year earlier.

Operating profit, however, rose 29 per cent to $4.72 billion, or $2,876 per Class A share, from $3.66 billion, or $2,228 per Class A share.

Analysts on average expected earnings of $2,593.85 per share, according to Thomson Reuters I/B/E/S.

Much of the drop in profit came from a $107 million loss on Berkshire's investments and derivatives, compared with a year-earlier $1.39 billion gain.

During the quarter, Berkshire wrote off $678 million on its investment in Tesco Plc, a British grocery chain being probed by regulators at home over accounting errors. Buffett has been reducing Berkshire's Tesco stake.

In contrast, year-earlier results included big gains on investments that Buffett made during the 2008 financial crisis, including in General Electric Co and Goldman Sachs Group Inc, and bonds related to candy maker Mars Inc's purchase of rival Wrigley.

Bill Smead, chief investment officer of Smead Capital Management in Seattle, said the swing in investment results took a backseat to the strength of operations at Berkshire's more than 80 companies.

"There are some line items in here that just scream operating success," said Smead, whose firm owns 333,000 Class B shares of Berkshire.

Smead pointed to insurance premiums earned, which rose to $12.72 billion from $9.27 billion in the year-ago quarter.

"The things they don't control like when they take gains worked against them," Smead said. "The things they do control, like insurance premiums, exploded."

Buffett, the world's third richest person according to Forbes magazine, has run Berkshire since 1965. He favors acquiring and investing in easy-to-understand businesses that have consistent earnings power and stable management.

In October, Berkshire agreed to buy Van Tuyl Group, the largest privately held U.S. auto dealership group. Analysts said the purchase could help Berkshire grow in related businesses, including insurer Geico.

ELEPHANTS IN EUROPE?

Profit from the BNSF railroad rose about 5 percent to $1.035 billion. In utilities and energy, profit jumped to $697 million from $472 million.

In addition to larger businesses such as insurance operations and BNSF, Berkshire's smaller businesses run the gamut from Benjamin Moore paint to Borsheim's jewelry, from Dairy Queen ice cream to Fruit of the Loom underwear.

And Berkshire Hathaway's portfolio comprises tens of billions of dollars of shares such as American Express Co (AXP.N: Quote, Profile, Research, Stock Buzz), Coca-Cola Co (KO.N: Quote, Profile, Research, Stock Buzz), International Business Machines Corp (IBM.N: Quote, Profile, Research, Stock Buzz) and Wells Fargo & Co (WFC.N: Quote, Profile, Research, Stock Buzz).

Book value per Class A share, Buffett's preferred measure of growth, rose 7.1 percent from the start of the year to $144,542.

Berkshire's cash stake soared during the quarter to $62.38 billion from $55.46 billion three months earlier.

While some of the cash hoard will go to Berkshire's purchase announced last month of Van Tuyl Group, the largest privately-held U.S. auto dealership group, it will still leave Buffett with plenty of cash to make one, or two, giant acquisitions.

Buffett has noted it has become harder to find so-called elephants, the kind of large acquisitions he favors, making it harder to put cash to work. He has said he wants to keep $20 billion on hand for potential insurance needs.

"Where he might get active (in acquisitions) is in Europe," where many economies are struggling, said Michael Yoshikami, a Berkshire investor and the CEO of Destination Wealth Management in Walnut Creek, California. "Really, domestically there's nothing that's going to be that cheap."

In Friday trading, Berkshire Class A shares rose 0.1 percent to a record close of $214,970. Its Class B shares ended the day up 0.2 percent at $143.61, also a record close.

(Reporting by Luciana Lopez and Jonathan Stempel; Editing by Jennifer Ablan, Bernard Orr)