Taking A Close Look At Berkshire Hathaway

| About: Berkshire Hathaway (BRK.A)

After releasing first quarter results and holding its world famous annual meeting this previous weekend, we think now is as good of a time as any to take a look at Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B). Over the years, bears have focused on Berkshire's size, the efficient market hypothesis, and dozens of other reasons why the company will underperform, but such has not been the case. During the first quarter of 2013, book value grew 5.5% sequentially. Earnings per share grew 51% year-over-year to $2,977, though CEO Warren Buffett and Vice Chairman Charlie Munger caution investors not to focus on quarterly earnings, particularly with the ebbs and flows of the insurance underwriting business.

Speaking of insurance underwriting, net earnings in the segment were approximately 17 times higher than a year ago at $901 million. Due to its superior capitalization, Berkshire is able to remain active in the insurance market when premiums are favorable, but sit on its hands during times of unprofitable underwriting practices. Significant foreign exchange fluctuations weighed on Berkshire Hathaway Reinsurance Group (OTCPK:BHRG) during the first quarter of 2012, while the firm received a benefit from currency fluctuations in the first quarter of 2013. Strict underwriting policies and investment of the float helps make Berkshire's insurance business look incredibly attractive relative to its peers.

In addition to strong insurance operations, Berkshire's operating businesses generate significant earnings and cash flow. Burlington Northern Santa Fe (BNSF) posted a 14% year-over-year gain in earnings, to $798 million. The threat of declining coal shipments hasn't reduced BNSF's earnings power because the railroad has been able to increase the amount of petroleum products it ships. Though US railroads will face competition from new pipelines, we think railroads will help alleviate supply bottlenecks for the next several years.

Mid-American Energy also experienced a solid increase in operating earnings, growing 17% year-over-year to $394 million. Colder weather helped boost energy consumption in the Midwest, which led to a rise in revenue and earnings. Mid-American is mostly a utility business, though the segment does include a pipeline operation.

Berkshire also owns several other businesses, which accounted for $22.5 billion in revenue (up 17% YoY) and $944 million in earnings (up 11% YoY). These companies are diverse, and include: Marmon Manufacturing, metalworking company Iscar, See's Candies, 50% of Heinz (in the coming quarters), several newspapers, McLane Distributors, Acme Building Brands, clothing and apparel manufactures, chemical maker Lubrizol, Benjamin Moore paint, and Clayton Homes. We believe these businesses are so vast and diversified that poor performance at some segments will be offset by strong performance at others.

We love Berkshire's decentralized management structure that allows Buffett and Munger to focus on capital allocation and leave operations to managers. Given Berkshire's ethos and focus on buying companies run by shrewd managers, we believe its system makes its operations superior to those of other conglomerates.

Of course, at this point, no one doubts that Buffett and Munger are among the greatest investors of al time. If anything, both have grown wiser with age rather than falling behind the times. The big question going forward lies in succession plans. Buffett and Munger have been pleased by new managers Todd Combs and Ted Weschler's and their investing performance thus far, and the firm has a deep bench of CEOs at its various operating companies. Regardless, Berkshire's board is in agreement as to who will become the next CEO, though the company refuses to say who it will be. Howie Buffett will become the gatekeeper of the Berkshire culture, becoming chairman whenever his father passes. Ultimately, we have faith that Buffett and Munger know best.

Although we do not hold shares of Berkshire in the portfolio of our Best Ideas Newsletter, it's hard not to like shares of a company run by the two greatest portfolio managers of all-time. We are confident that the company will be left in good hands - we doubt Buffett and Munger would leave shareholders with anything but the best. Berkshire's tremendously successful corporate culture could endure for years beyond the lives of its top managers. We'd evaluate shares for our Best Ideas portfolio near 120% of book value, a level Berkshire targets for share repurchases.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.