Berkshire Hathaway Benefits From An Improving U.S. Economy

Aug. 3.14 | About: Berkshire Hathaway (BRK.A)


Berkshire posted strong results with a 44% gain in net income.

The company's book value continued to climb by almost 6%.

The company benefits from an improving U.S. economy.

Berkshire Hathaway (NYSE:BRK.A), (NYSE:BRK.B) posted strong results in the second quarter of this year, as the company's quarterly net profits rose 41% compared to the same period a year ago. The company reported strong results across the board.

Revenues continued to grow everywhere

Berkshire's insurance business generated revenues of $9.32 billion from premiums, up from last year's $8.82 billion. Sales and service revenues were up from $23.41 billion to $24.85 billion. Interest, dividend and other investment income fell from $1.61 billion to $1.58 billion while investment gains jumped sharply from $455 million to $2.37 billion (including the sale of Washington Post). All in all, Berkshire's insurance segment saw its revenues rise from $34.29 billion to $38.12 billion, a rise of 11.17%.

The company's "Railroad, Utilities and Energy" segment reported revenues of $9.85 billion, up 17.5% from last year's $8.38 billion. Berkshire's "Finance and Financial Products" segment reported $1.80 billion in revenues, down from $2.03 billion in the same quarter last year. All in all, the company posted $49.76 billion in revenues, up from $44.69 billion last year. This corresponds to an increase of 11.35%.

Expenses grew at a slower rate than revenues did

Similarly, Berkshire's operating expenses rose from last year but the rate of increase was not as large as the rate of increase we saw in the company's revenues. Berkshire's insurance business posted operating expenses of $31.83 billion, up from last year's $30.06 billion. This represents an increase of 5.89%. The company's railroad, utilities and energy segment posted a bigger increase in operating expenses, as the segment's expenses rose from $6.09 billion to $7.19 billion, signaling an increase of 18.12%. Finally, the Finance and Financial Products segment saw its expenses rise from $1.20 billion to $1.23 billion, a smaller increase than the other segments. All in all, the company reported $40.85 billion in operating expenses, up by 8% from last year's $37.80 billion. Since the revenues rose faster than expenses did, the company posted before-tax profits of $8.91 billion for the last quarter, up by 29% from last year's $6.89 billion. After taxes, the company earned $6.46 billion, up sharply from $4.61 billion. This figure includes asset sales, such as the company's stake at Washington Post.

Berkshire's book value continued to post healthy growth

The company's assets rose significantly during the quarter. Berkshire's insurance business increased its cash reserves from $42.43 billion to $49.18 billion and the Finance and Financial Products segment was able to improve its cash position from $2.35 billion to $2.86 billion since the beginning of the year. Berkshire's railroad, utilities and energy segment posted a cash growth of $10 million, as its cash positions improved from $3.40 billion to $3.41 billion. All in all, Berkshire's assets rose to $504.38 billion (up from $484.93 billion) and the company's book value jumped from $224.49 billion to $236.76 billion. In the first six months of this year, Berkshire generated $11.23 billion of cash from its operations, up from the operating cash flows of the first half of last year, $9.63 billion.

All in all, the company holds more than $55 billion in cash and many investors are wondering how the company will spend this money. It is very likely that Berkshire will hold onto its cash in order to be prepared in case the stock market comes to a sharp decline and new opportunities emerge in the market. Berkshire is always looking for companies to acquire as long as they provide financial value and consistency. While the company collects dividends from many of its holdings, it refuses to pay dividends to its shareholders. On the other hand, the investors of Berkshire are generally content with this, as the company's share price appreciation tends to be strong enough to make them happy in the long run.

The improving economy helped the company move on all four cylinders

The company benefited greatly from an improving U.S. economy. The company owns more than 80 businesses of varying sizes representing a variety of industries. The diversification of Berkshire's assets allows the company to enjoy a stable business environment, minimize risks and exposure to certain industries, and this allows the company to benefit from economic recoveries in robust ways. Berkshire also benefits from the bull market we have been experiencing since 2009, as almost all of the company's holdings appreciated greatly in value. Furthermore, this quarter's net income was an all-time record for Berkshire and the company's previous record belonged to the fourth quarter of 2005 with net income of $5.13 billion.

After being hit by a harsh winter, Berkshire's railroad business shows signs of improvement in the second quarter. An improving U.S. economy helped with boosting transportation activities within the country. This business also saw positive effects of an improving housing market, as builders were trying to keep up with an increased demand.

Berkshire's stock-swap-deal with Graham Holdings (NYSE:GHC) allowed it to purchase the WPLG television station based in Miami, while giving some assets in exchange. The deal proved profitable for Berkshire without having tax implications. This move has helped with the company's profit beat in the quarter.

This was one of those quarters where everything seemed to work out for Berkshire and the company continued its run on all four-cylinders. Apart from the railroad, insurance and finance businesses, the company also saw some strong results in its retail, service and manufacturing businesses. As much as operating income goes, Berkshire's manufacturing, service and retail operations grew by 29% and the company's energy and utilities business grew by 34% compared to last year.

Closing thoughts

This was a great quarter for Berkshire and a good sign that things will be moving in the right direction for the investors of the company for the remainder of the year. Berkshire is in a great position to benefit from an improving economy, and the company also possesses a large amount of cash in case the economy takes a wrong turn and buying opportunities arise. Dividends are not likely to come to investors of this company anytime soon; however, they should continue seeing value appreciation for years to come.

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