Berkshire Hathaway profit slips as market turbulence hits home

By Stephen Gandel November 7, 2021 â€" 11.09am

Berkshire Hathaway, the conglomerate run by billionaire investor Warren Buffett, has reported a sharp decrease in earnings in the third quarter, reflecting the turbulent financial markets as well as a slowdown in the US economic recovery with a spike in COVID-19 cases.

Profits fell by one-third to $US10 billion ($13.4 billion), down from $30 billion ($40.2 billion) in the same three months of 2020, when the economy was still in the process of reopening from pandemic shutdowns.

Berkshire’s bottom line was dragged down by its giant investment portfolio, which fell 85 per cent from a year ago. But profits at Berkshire’s operating businesses, which include a railroad as well as a variety of manufacturing and retail businesses that mirror the broader US economy, also disappointed. Income there rose just 18 per cent from a year ago. That was much less than the 40 per cent jump that some analysts had predicted and slower than the 21 per cent increase in profits those operating businesses had in the second quarter.

Berkshire Hathaway chairman Warren Buffett, left, with long-time business partner Charlie Munger.Credit:AP

In addition, Berkshire recorded nearly $US800 million in losses from insurance underwriting, as claims from bad weather, including Hurricane Ida, increased. And while the income from premiums at its popular car brand Geico rose in the quarter, its losses from accident claims rose even more as drivers returned to the roads. It also noted that the average claims were higher because of “the increase in the valuation of used vehicles.”

In its railroad business, Berkshire said shipping volumes rose 4.4 per cent in the third quarter, showing the economy’s continued growth. But fuel costs rose nearly 80 per cent, muting profits.

Overall, Berkshire said its businesses were affected by “ongoing global supply chain disruptions” as well as higher prices for raw materials. “While consumer demand for products remained high, earnings in the third quarter of 2021 were sequentially lower than the second quarter,” Berkshire wrote in its filing. “Several of our businesses experienced higher material, freight and other input costs attributable to ongoing disruptions in global supply chains.”

The US economy has been left battered by the pandemic.Credit:Bloomberg

As expected, Berkshire’s results showed that it hadn’t made any significant acquisitions in the third quarter. Buffett has been under pressure to do something with his conglomerate’s growing cash reserves, which at the end of the third quarter had grown to just more than $US149 billion, higher than at any point in the company’s history. At Berkshire’s annual meeting earlier this year, Buffett said that a boom in the financing of special purpose acquisition companies, SPACs, had pushed up the price of potential deals. “Frankly, we’re not competitive with that,” Buffett said.

Berkshire’s largest investment in the quarter was in its own stock. Berkshire repurchased $US7.6 billion of its own shares from the end of June to the end of September. That was on top of the $US12.6 billion in shares that Berkshire bought in first half of the year.

The purchases reflect Buffett’s belief that Berkshire’s shares, which fell slightly in the third quarter, are undervalued. They are also at odds with what Buffett has previously said about stock repurchases. In the past, Buffett has called stock buybacks at times “immoral” as well as unfair considering that executives often know more about the dealings of their companies than outside shareholders. He has also said that buybacks can be the result of executives who are either naturally overconfident about the prospects of their own companies or want to signal that they are confident.

Democrats, some of whom argue that companies have abused stock buybacks to avoid taxes or paying more to workers, have proposed taxing the buybacks to help pay for President Joe Biden’s spending proposals. Earlier this week, Buffett’s longtime partner, Charlie Munger, told CNN that he thought politicians were misguided to punish companies for buying back their shares. “I think it’s insane,” said Munger, who describes himself as a Republican. “It is so irrational, and I think it sort of destroys the whole system, once you start tinkering from Washington.”

This article originally appeared in The New York Times.

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