Berkshire profit falls 24 percent, keeps Wells Fargo stake

[November 05, 2016]  By Jonathan Stempel

(Reuters) - Berkshire Hathaway Inc on Friday said third-quarter profit dropped 24 percent from a year earlier, when it recorded a large one-time gain, but acquisitions helped boost operating profit at the conglomerate run by billionaire Warren Buffett.

The company also reported a $22.1 billion stake in Wells Fargo & Co as of Sept. 30, suggesting it kept its 10 percent ownership position even as the bank became embroiled in a scandal over its creation of unauthorized customer accounts.

Berkshire is Wells Fargo's largest shareholder.

Quarterly net income for Omaha, Nebraska-based Berkshire fell to $7.2 billion, or $4,379 per Class A share, from $9.43 billion, or $5,737 per share, a year earlier.

Operating profit, which excludes investment and derivative gains and losses, rose 7 percent to $4.85 billion, or $2,951 per share, from $4.55 billion, or $2,769 per share.

That missed the average $3,058.10 per share forecast of analysts polled by Thomson Reuters I/B/E/S, in part reflecting weaker results at the Geico auto insurer and BNSF railroad, and falling demand from customers in industrial sectors.

Results included a $1.6 billion gain when Mars Inc bought Berkshire's preferred stock investment in its Wrigley chewing gum business. Last year's results included a $4.4 billion gain related to the food company Kraft Heinz Co.

Revenue was nearly unchanged at $59.1 billion. Book value per share, Buffett's preferred measure of growth, rose 2 percent from the end of June to $163,783.

Berkshire also ended September with $84.8 billion of cash, despite having completed a $32.1 billion purchase of aircraft parts maker Precision Castparts Corp in January that was a key factor behind the boost in operating profit.

In a change, Buffett highlighted the cash hoard in Berkshire's press release accompanying results.

"He has $85 billion of cash earning nothing," said Steven Check, who invests $1.1 billion, of which 30 percent is in Berkshire, at Check Capital Management Inc in Costa Mesa, California. "It gives Berkshire a lot of pent-up firepower for more acquisitions."

WELLS FARGO

Since taking over Berkshire in 1965, Buffett has built a conglomerate with roughly 90 businesses including Brooks running shoes, Dairy Queen ice cream and Fruit of the Loom underwear.

Berkshire also owns dozens of companies' stocks, including Apple Inc, Coca-Cola Co and International Business Machines Corp.

Though the value of the Wells Fargo investment fell from $23.7 billion at the end of June, the decline can be explained by the more than 6 percent drop in the bank's share price.

That suggests that Berkshire has kept its roughly 500 million shares in the third-largest U.S. bank.

Buffett has over the years repeatedly praised Wells Fargo, whose stock Berkshire has owned since 1989, and this year asked the U.S. Federal Reserve for permission to buy more.

Berkshire Hathaway shareholders walk by a video screen at the company's annual meeting in Omaha May 4, 2013. REUTERS/Rick Wilking/File Photo

But he also warned that companies guard against the kind of reputational damage that Wells Fargo has suffered over the sham accounts, estimated to number up to 2 million, which have prompted a variety of potentially costly regulatory probes.

Buffett has said he would talk this month about the scandal, which emerged on Sept. 8 when Wells Fargo agreed to pay $185 million in fines to settle charges by U.S. regulators and a Los Angeles prosecutor.

BNSF STRUGGLES

Berkshire's operating businesses posted mixed results.

Overall insurance profit fell 11 percent to $1.12 billion, and included a 34 percent drop from underwriting.

Geico saw pre-tax underwriting gains slide by 47 percent in the quarter, as higher losses from storms and accidents offset increases in premium rates.

But float, or the amount of insurance premiums collected before claims are paid and which help fund Berkshire's growth, rose to $91 billion from $90 billion at the end of June.

Profit from manufacturing, service and retailing companies rose 45 percent to $1.7 billion, as the addition of Precision helped offset "sluggish demand" for industrial products from the oil and gas and heavy equipment industries.

BNSF saw profit fall 12 percent to $1.02 billion, hurt by a decline in coal and petroleum shipments that has dampened results this year and which Berkshire expects to persist.

The Berkshire Hathaway Energy unit saw profit rise 19 percent to $932 million, helped by higher electricity margins at its MidAmerican Energy unit.

In Friday trading, Berkshire Class A shares fell $456, or 0.2 percent, to $214,545 and Class B shares fell 69 cents, or 0.5 percent, to $142.95.

(Reporting by Jonathan Stempel in New York; editing by Bill Rigby, G Crosse and Andrew Hay)

[© 2016 Thomson Reuters. All rights reserved.]

Copyright 2016 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.