Despite Derivatives Losses, Berkshire Hathaway Makes Billions (BRK-A) (BRK-B)

Warren Buffett is still making billions for Berkshire Hathaway Inc. (NYSE: BRK-A).  The conglomerate just reported operating earnings of $3.074 billion versus $1.78 billion in the second quarter of 2009.  There is also a “sale of investment” listed as being $308 million.  The Class-A operating earnings per share was listed as $1,866 per share on an adjusted basis.  Thomson Reuters had estimates at $1,360.44 EPS on last look, although we would caution on any Buffett ‘consensus’ because the pool of analysts is so small.  The figure compares to last year’s figure of $1,147 per share.

The big question was always going to be on the ‘items’ inside all of its investments.  That is particularly the case on derivatives.  The company disclosed that its losses from derivatives was $1.414 billion.  This puts the net attributable earnings to shareholders at $1.968 billion.  The net compares to a $3.295 billion figure a year ago, and that difference is because the year ago figure also included $1.532 billion in derivative gains.

The good news that some will takeaway from the derivatives exposure is that the company noted ASU2010-20 adoption is not seen as having a material financial impact and it further noted that financial reform is not expected to have a material impact on its financial results.  It noted, “Virtually all major areas of the Reform Act will be subject to regulatory interpretation and implementation rules requiring rule-making that may take several years to complete.”  Also noted was, “we do not believe that the provisions of the Reform Act that concern collateral requirements apply to derivatives contracts that were entered into prior to the enactment of the Reform Act, as ours were.  As such, although the Reform Act may affect some of our business activities, it is not expected to have a material impact on our consolidated financial results or financial condition.”

The net figure after you back out a $671 per share hit against earnings from the derivatives losses comes to earnings of $1,195 per share.  Whether you choose to use the ‘net’ or adjusted earnings per share figure against that small consensus estimate of $1,360.44 is up to you.  Frankly, we almost disregard the estimates because the group is so small and because Buffett doesn’t reveal much to offer much guidance or clarity ahead of time.

We just noted a week ago how Berkshire Hathaway had been the top performing conglomerate and outperformed the broad stock market in 2010.  The equivalent of Class-A shares outstanding at the time is noted as 1,647,175 shares versus 1,551,724 a year ago.

Operational earnings were $462 million in insurance underwriting, $1.088 billion in insurance investment income, earnings from operations in non-insurance businesses was $1.604 billion, and a loss of $80 million from “other” operations.  Much of the issue tied to a big operating gain from non-insurance appears to be due to the BNSF operations because non-insurance was ‘only’ $561 million a year ago.  Berkshire noted that BNSF added $603 million in the second quarter.  NetJets was also noted as turning around.

The Insurance float of net liabilities assumed under insurance contracts at June 30 was $63 billion.  On this it noted, “Adjusting for the change related to the life annuity business, float was relatively unchanged as compared to float at year-end.”

The book value as of June 30, 2010 was up 2.6% at $86,661 per Class-A share equivalent.  The A-Share closing price on June 30, 2010 was $120,000.00.  That is not exactly a low premium.  Buffett’s full holdings of public stocks inside Berkshire is available to see as well.

The result just depends upon how you look at Berkshire Hathaway and Buffett.  It is easy to say that net income fell sharply because of the derivatives.  It can also be argued that operational income grew sharply because of the addition of the rail operations from BNSF.

The A-Shares just closed down 0.65% at $120,600.00 today and the B-Shares were down 0.45% at $80.47.

JON C. OGG