Keep the faith, says Buffett
• CEO undaunted after Berkshire Hathaway posts flat full-year profit
Warren Buffett has mounted a forceful and upbeat defence of the prospects for US business, as Berkshire Hathaway reported a higher quarterly profit, but a fall in operating income.
In his annual letter to Berkshire shareholders on Saturday, CEO Buffett said investors “will almost certainly do well” by staying with a “collection of large, conservatively financed American businesses”.
Buffett puts Berkshire in that category, using the letter to tout the successes of many of his conglomerate’s more than 90 operating units. These included businesses such as BNSF Railroad and Geico vehicle insurance, which posted weaker results last quarter.
“American business — and consequently a basket of stocks — is virtually certain to be worth far more in the years ahead,” Buffett wrote. “Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.”
For the fourth quarter, Berkshire’s net income rose to $6.29bn, or $3,823 per class A share, from $5.48bn, or $3,333 per share, a year earlier.
It was helped by a $1.1bn increase in gains from investments and derivatives.
Operating profit fell 6% to $4.38bn, or $2,665 per share, from $4.67bn, or $2,843 per share. Analysts, on average, had forecast operating profit of $2,716.60 per share, according to Thomson Reuters I/B/E/S.
Book value per class A share, reflecting assets minus liabilities and which Buffett calls a good measure of Berkshire’s intrinsic worth, rose 11% to $172,108.
For all of 2016, profit was virtually unchanged, dropping to $24.07bn from $24.08bn.
Operating profit rose just 1% to $17.58bn, despite January’s $32.1bn purchase of aircraft parts maker Precision Castparts, Berkshire’s largest acquisition.
The company also owns dozens of stocks including Apple, Coca-Cola, Wells Fargo, the four biggest US airlines and more than one-fourth of food company Kraft Heinz.
Buffett said Berkshire still had about $86bn of cash and equivalents, despite recent heavy spending on Apple and airline stocks.
Quarterly profit from insurance operations rose 7% to $1.44bn, as underwriting gains at the Berkshire Hathaway Reinsurance Group more than offset a loss at Geico, where claims for losses have been rising.
The reinsurance business is run by Ajit Jain, widely considered a potential successor for Buffett as CEO. Buffett said Jain had created “tens of billions of dollars of value” since joining Berkshire in 1986.
“If there were ever to be another Ajit and you could swap me for him, don’t hesitate,” Buffett wrote. “Make the trade!”
The insurance units ended 2016 with $91.6bn of float. That is the amount of premiums held before claims are paid and Buffett uses it to fund acquisitions and other investments. That sum now tops $100bn, probably reflecting a giant transaction in January with insurer American International Group.
HUGE INVESTMENTS
Profit at BNSF, Berkshire’s largest purchase before Precision Castparts, fell 8% to $993m. The railway company has been stung by falling coal and industrial volumes and it shed 2,000 jobs, or 4.5% of its workforce, in 2016.
But Buffett said society “will forever need huge investments” in transport and BNSF was well served by a strong balance sheet, recent capital upgrades and a growing emphasis on clean technology.
“Charlie and I love our railroad, which was one of our best purchases,” Buffett said, referring to longtime Berkshire vice-chairman Charlie Munger.
Berkshire Hathaway Energy, another major business for the conglomerate, posted a 2% increase in profit to $432m.
In Friday trading, Berkshire’s class A shares closed at $255,040 and its class B shares closed at $170.22. Both were record closing highs.
The shares outperformed the S&P 500 stock index, including dividends, by 11.4 percentage points in 2016, after lagging by 13.9 percentage points in 2015.