Berkshire Hathaway’s operating profits recorded a 4% drop in the quarter compared to 2024. The per-share operational earnings also decreased by 4% for the quarter, with no shares bought back over the last year. The company’s second-quarter saw earnings of nearly $12.4 billion, substantially below than $30.3 billion of the same period in 2024. The primary factor for this sharp decrease was a significant fall in stocks.
In order to better grasp the company’s earning capability, we must examine their operational earnings that exclude market fluctuations. Unfortunately, these, too, dropped by 4% for the quarter compared to the same time period in 2024. Moreover, Berkshire Hathaway didn’t repurchase any shares during the last year, causing its per-share operational income to decrease by 4% for the quarter.
Berkshire Hathaway revealed an impairment to their investment in Kraft Heinz, a company that had been valued higher on Berkshire’s books for a time. However, changes in circumstances led Berkshire to take a pretax impairment loss of around $5.0 billion. Subsequently, the carrying value of the Kraft Heinz investment was brought down to its actual value.
Insurance, followed by manufacturing, service, and retailing segment, contributes immensely to Berkshire’s business in terms of operating earnings. The insurance underwriting operations primarily led to the drop in operational earnings. Other income also observed a significant decrease, mainly due to the accounting for shifts in foreign currency. Eliminating insurance and the ‘other’ sector demonstrates a growth of 13% in operational earnings.
When it comes to investment in insurance, two crucial concepts emerge: ‘float’ and underwriting profit. The concept of ‘float’ arises as insurance premiums are paid up front, prior to any insurance claims from the insured, providing companies like Berkshire leverage to invest these funds. Berkshire’s float, standing at $174 billion, was $3 billion higher as compared to December 31, 2024.
The insurance company reaps greater benefits as the value of float increases alongside rising yields, due to better earnings from investing the cash. The per-share float stood at $120,983, a figure higher than it was at the end of 2024. However, the underwriting profit comparison with the second quarter of 2024 posed a formidable challenge. Despite that, the number of policies in force at GEICO witnessed an increase during the second quarter.
In the North American terrain, Berkshire boasts one of the largest railroads, the Burlington Northern Santa Fe (BNSF) railroad, that operates across the US and Canada. The railroad freight volume noticed a slight improvement, thereby propelling the operating earnings with an estimated growth of 19% compared to the same quarter of the previous year. Several other aspects showcased improvements such as the operating ratio over the trailing 12-month period.
Looking at the utilities and energy unit, BHE, we observe a minor negative impact on the headline numbers. The operating earnings of BHE fell by 2.6% over the same quarter last year. This fall can be attributed to several factors including, a higher interest expense, decreased margin, and lower other income.
In the segment of manufacturing, services, and retailing, the pretax earnings increased by 4.7%. This area includes a plethora of different companies. Particularly, in the service segment, we noticed a 15.2% increase in pretax earnings for the quarter. The retailing group also saw a strong recovery in earnings growth, marking an 11.9% rise for the quarter.
Also deserving of a mention is McLane’s, where pretax earnings ascended by quite a remarkable 23.9%.
On the other hand, operating profits for businesses not under control, alongside other segments, declined massively by 97%, primarily because of losses incurred through foreign currency exchange rates. While this may alarm some, it’s worth mentioning that significant assets and earnings of Berkshire are denominated in these foreign currencies, making it less of a concern.
Currently occupying Berkshire’s insurance company investment portfolio are 52% publicly traded stocks and 44% in cash. With cash accounting for nearly 29.6% of Berkshire Hathaway’s size — a record-high — it gives them greater flexibility to seize opportunities, including buy-back of its own stocks at compelling price points. Despite high evaluations making share repurchases unattractive, the possibility of generating value by leveraging this aspect may soon make a comeback.
During times of financial volatility, investors sought refuge in Berkshire’s stock. However, as recession fears subsided, a shift was seen in investor behavior, leading them to redistribute their funds into other stocks. This caused Berkshire’s valuation to stretch in May.
Though Berkshire Hathaway’s operating earnings saw a slight decrease on a year-over-year basis, some aspects of the data offered a silver lining. Once we remove the insurance and the other segment, the operational profits report a growth of 13% year-over-year. Notably, the railroad sector made commendable strides in its efforts towards enhancing productivity and consequently escalating profits.
Furthermore, the manufacturing, service, and retailing segment showed an unexpected resilience, registering a 12% increase in operational earning over the year. These figures indicate a robust performance from the key sectors, fostering steady growth across Berkshire Hathaway’s diverse business operations.
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