Berkshire Hathaway Returns Strong Results

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Berkshire Hathaway Inc (NYSE:BRK.A) (NYSE:BRK.B) released its annual report this morning, saying that the firm’s net worth gain in all of 2013 was $34.2 billion. That was after deducting $1.8 billion in charges from their purchase of minority interests in Iscar and Marmon. The firm did fall short, however, in 2013 because the market was especially strong. Berkshire underperformed in ten of their 49 years with all but one of its shortfalls happening when the S%P 500 gain was more than 15%.

Breaking down Berkshire’s results

The firm’s net income was $19.5 billion in all of 2013. For the fourth quarter, Berkshire Hathaway Inc (NYSE:BRK.A) (NYSE:BRK.B)’s profits rose 10% to $4.99 billion, or $3,035 per Class A share, thanks to the improving U.S. economy, which also presented a challenge for Buffett’s investing strategies in other ways.

For the quarter, Berkshire Hathaway Inc (NYSE:BRK.A) (NYSE:BRK.B)’s operating profit was $3.78 billion or $2,297 per share. On average, analysts had been expecting the firm to report operating earnings of $2,203.91 per share.

Looking back at Berkshire in 2013

During all of 2013, Berkshire Hathaway Inc (NYSE:BRK.A) (NYSE:BRK.B) made two major acquisitions for nearly $18 billion, buying a major interest in H.J. Heinz and all of NV Energy. In the Heinz transaction, Berkshire bought $8 billion of the company’s preferred stock with a 9% coupon and partnered with 3G Capital. Buffett said in his letter that they never intend to sell any of its shares.

Berkshire Hathaway Inc (NYSE:BRK.A) (NYSE:BRK.B) subsidiary MidAmerican Energy purchased NV energy for $5.6 billion. Buffett called MidAmerican one of their “Powerhouse Five,” which he defines as their non-insurance businesses which, in aggregate, had a record $10.8 billion in pretax earnings in 2013. The other four companies in that group are Iscar, Marmon, Lubrizol and BNSF.

The firm said if the U.S. economy continues improving this year, they expect continued improvement in the earnings of their Powerhouse Five, perhaps by as much as $1 billion before taxes. Berkshire Hathaway Inc (NYSE:BRK.A) (NYSE:BRK.B) also said that its “dozens of smaller non-insurance businesses” saw an increase in pretax earnings as well last year–$4.7 billion—and they expect more gains this year as well.

Berkshire Hathaway Inc (NYSE:BRK.A) (NYSE:BRK.B)’s insurance businesses operated with an underwriting profit in 2013, which is the eleventh year in a row. It also increased its float to $77 billion. The firm’s underwriting profit aggregated $22 billion before taxes, including $3 billion realized in 2013.

Berkshire Hathaway highlights “bolt-on” acquisitions

Warren Buffett said they continue to search for “elephants,” which he has, in the past, called his major acquisitions. However, in the meantime, Berkshire Hathaway Inc (NYSE:BRK.A) (NYSE:BRK.B)’s subsidiaries have been making “bolt-on acquisitions” on a regular basis. The firm contracted for 25 of the in 2013, which are scheduled to cost $3.1 billion in aggregate and ranged from $1.9 million up to $1.1 billion in size.

He said that he and his partner Charlie Munger encourage such deals because they put ore capital into activities which fit in with what they already do and create “no more work for us and more earnings for you.” He expects “many more” bolt-on acquisitions in future years.

In 2013, Berkshire Hathaway Inc (NYSE:BRK.A) (NYSE:BRK.B) also increased its ownership interest in what Buffet calls their “Big Four” investments: American Express Company (NYSE:AXP), The Coca-Cola Company (NYSE:KO), International Business Machines Corp. (NYSE:IBM) and Wells Fargo & Co. (NYSE:WFC). Berkshire’s portion of these companies’ 2013 earnings added up to $4.4 billion, although they included only the dividends, which amounted to $1.4 billion.

Buffett also commended portfolio managers Todd Combs and Ted Weschler, both of whom outperformed the S&P 500, which “most equity managers found it impossible” to do. He also said that their investments outperformed his own.

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