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Warren Buffett’s Berkshire Hathaway Inc. is reaping the rewards of the US economic recovery.
The conglomerate’s collection of manufacturers and retailers rebounded in the second quarter after being hit hard by the pandemic that ravaged the United States last year. The group of companies posted their second-highest quarterly profit on record dating back to mid-2009 and contributed to a 21% increase in Berkshire’s total operating profit during the period.
“It’s all of the other companies in the old economy, manufacturing, service, retail and transportation that really reflect the broad economic recovery that has driven this performance this quarter,” said Jim Shanahan, analyst at Edward Jones, in a telephone interview. “There is a housing angle here which I think has been a very significant contributor this quarter.”
Buffett has built Berkshire into a large company with industries such as insurance, energy and retail. But that exposure to a large slice of the U.S. economy weighed on it last year, as companies like See’s Candies had to put workers on leave as closures began. Now the outlook looks brighter.
“Many of our businesses generated significantly higher profits in the first half of 2021 compared to 2020, which included significant negative effects from the pandemic,” Berkshire said in a regulatory filing on Saturday. “Profits from our manufacturing, service and retail operations in 2021 benefited from increased customer demand in many of our businesses and also exceeded earnings in 2019.”
The Berkshire group of construction products companies were a particular source of strength during the quarter. Profits from these operations rose nearly 40%, helped by the benefit of US home construction. Tom Russo, a Berkshire shareholder, said the strength of these companies combined with the challenge of disrupting them through technology makes them a good part of Berkshire’s makeup. .
“Companies have a certain underlying recurrence which I think makes them attractive,” said Russo, who oversees $ 10 billion, including investments in Berkshire stocks at Gardner Russo & Quinn LLC, at a telephone interview.
What Bloomberg Intelligence says
“Warren Buffett’s Berkshire Hathaway is on track for a strong 2H with approximately 30% growth in unit operating profits in 2Q. It was an easy comparison, but profits were above the 2016-19 averages in all four segments. “
–Matthew Palazola, Senior Industry Analyst, and Kylie Towbin, Associate Analyst
Still, Berkshire was not immune to the supply chain pressures that have been a lingering economic theme from the early days of the outbreak. The higher costs of certain materials such as lumber and steel have caused some of these operations to raise their own prices, Berkshire said.
Not all Berkshire businesses have fully bounced back. Precision Castparts Corp., which manufactures parts for aircraft and suffered a steep depreciation last year, saw revenue declines during the period, although profits edged up due to the company’s restructuring efforts. company. And Berkshire has warned that supply chain issues could continue to weigh on this business.
“The Covid-19 pandemic has contributed to significant declines in commercial air travel and aircraft production in 2020,” Berkshire said on the file. “As air travel to the United States increases in 2021, we do not anticipate a significant increase in aerospace demand for PCC in the near term due to inventory levels currently within the industry supply chain. . Therefore, we predict that PCC’s revenue and profits in 2021 will be lower than pre-pandemic levels. “
Here are other takeaways from Berkshire’s second quarter earnings:
Redemptions
Berkshire has withdrawn one of Buffett’s most used capital deployment levers in recent years. The conglomerate repurchased $ 6 billion of shares, down from the $ 6.6 billion repurchased in the first three months of the year, with June being the busiest month in buybacks for the company.
This has helped Berkshire’s treasury remain fairly stable at $ 144 billion, just slightly below its record size. Buffett has struggled in recent years to find attractive ways to make that money work, and that continued into the second quarter.
“He is very sensitive to the price of redemptions,” said Bill Smead, chief investment officer of Smead Capital Management, which oversees investments, including in Berkshire stocks.
Still, the $ 6 billion in buybacks was the fourth highest amount of shares repurchased since Berkshire changed its policy in 2018. And there are signs that the relatively high level of buybacks could continue. Berkshire appears to have repurchased at least $ 1.7 billion in shares from late June to July 26, according to the filing.
Share sales
Buffett continued to be rather cautious about the US stock market. Berkshire ended up selling $ 1.1 billion in shares, on a net basis, during the period, marking its third consecutive quarter as a net seller.
The conglomerate faces even more expensive stock prices as the S&P 500 hit new highs in the quarter. Some of the sales appear to come from a reduction in Berkshire’s industrial, commercial and other holdings. The exact investments the company cut will appear on a regulatory filing later this month.
“I don’t think stocks are cheap. I think there are many areas of the market that are fully priced or maybe more than fully priced, ”said James Armstrong, who manages assets including Berkshire stocks as chairman of Henry H. Armstrong Associates. “There is no rush to accumulate money in stocks that are full or overvalued. So I think you just see good discipline from Berkshire.
Car accidents
Auto insurers have felt the pain of more drivers hitting the road, and Geico of Berkshire was no exception. The company ended up posting an almost 70% drop in underwriting profit in the second quarter.
It was penalized by an increase in the frequency of claims and the severity of these claims. Frequency was affected by more drivers getting behind the wheel during reopening in the United States
“Insurance results were particularly weak,” said Cathy Seifert, analyst at CFRA Research. “What we’ve seen from a lot of carriers is, year over year, in Q2 2020, people were in lockdown mode, people were not driving, so the frequency and severity were down. Then we started to see a little change. Thus, from one year to the next, the frequency of complaints has increased considerably.
Rail gains
The Berkshire Railway BNSF posted a record quarterly profit thanks to its past efforts to boost productivity and economic recovery.
Freight volumes have increased in all of its product categories – consumer, industrial, agricultural and coal. Consumer product shipping has benefited from e-commerce activity and auto shipments, Berkshire said.
“They reported a pretty big increase in volume revenues,” said Shanahan of Edward Jones. “What’s really powerful about BNSF’s results is that the margins are really strong.”
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