On Friday Berkshire Hathaway (BRK.B) released its third quarter earnings report, and the headline news was negative. Bloomberg reported that Berkshire's "third-quarter profit fell 24 percent to $2.28 billion as its derivative bets declined in value." The reason for the decline, however, was a change in the value of its long-term derivative investments, which Bershire is required to mark to market every quarter and therefore has an outsize effect on its earnings. The proper way to evaluate Berkshire's quarter is to examine its operating earnings, and this quarter's operating earnings were excellent.
Berkshire's book value declined 1.7% on a sequential basis, but is up 0.6% from the end of 2010, and is up 6.0% on a year-over-year basis. As I've argued in an in-depth series on Berkshire's business units, however, book value is not the best way to evaluate this large conglomerate. Looking at overall operating earnings gives a much better picture of the overall health of Berkshire's various businesses. And operating earnings this quarter were $3.8 billion, or $1.58 per B share. This is a 27.5% increase over the year-ago quarter, and a 41% over the second quarter of this year.
However, even quarterly operating earnings aren't always the best way to judge Berkshire. Berkshire has several large insurance subsidiaries, and these have highly variable earnings depending on when claims are paid out. This quarter, for example, Berkshire's insurance subsidiaries recorded after-tax earnings of $1.09 billion, while the second quarter had a net loss of $7 million. Full year calculations are a better measure of Berkshire's insurance businesses, and even then there are significant variations.
Quarterly results are a much better tool for analyzing Berkshire's railroad, utility, manufacturing, and retailing divisions. Berkshire wholly owns the railroad Burlington Northern Santa Fe (BNSF), and BNSF has shown significant increases in revenue and earnings. BNSF's third-quarter revenue is 13% higher than the third-quarter of 2010, and its earnings are 8.5% higher. For the first nine months of 2011, BNSF recorded 15.7% higher revenue and 13.7% higher earnings.
Berkshire's utility and energy businesses are principally organized under MidAmerican Energy, operating domestic and international (in the United Kingdom) electricity generation and distribution as well as natural gas pipelines. These businesses recorded 12.4% higher earnings in the third-quarter compared with the year-ago quarter, in line with the 12.8% increase for the first nine months of 2011 compared with the same period in 2010.
Berkshire's manufacturing, service, and retailing segment is its largest segment by revenue. This unit includes Berkshire's stake in Marmon, itself a diversified company, McLane, a grocery and food service supply chain company, as well as smaller units such as Iscar, Acme Brick, and Shaw. This segment recorded earnings nearly 30% higher compared with the year-ago quarter, and the nine month results were similarly excellent with a 21.8% increase. This is on the strength of just 7% higher revenue for the quarter, and 7.4% for the nine-month period.
In summary, Berkshire's less volatile businesses are the businesses for which book value is not the proper valuation metric and account for about three-quarter's of Berkshire's revenue and earnings. All of these showed excellent earnings growth, and combined for an earnings increase of 17% over the year-ago quarter.
Disclosure: I am long BRK.B.
