Tags: Berkshire | Earnings | Decline | Derivatives

Berkshire Profit Declines 24 Percent on Equity Derivatives

Friday, 04 November 2011 07:29 PM

Berkshire Hathaway Inc., the firm run by billionaire Chief Executive Officer Warren Buffett, said third-quarter profit fell 24 percent as derivative bets declined in value.

Net income declined to $2.28 billion, or $1,380 a share, from $2.99 billion, or $1,814, a year earlier, the Omaha, Nebraska-based company said today. Operating earnings, which exclude some investment results, were $2,309 a share, beating the $1,796 average estimate of three analysts surveyed by Bloomberg.

Buffett, 81, uses derivatives to speculate on long-term gains in stocks and the creditworthiness of corporate and municipal borrowers. Stock markets dropped in the three months ended Sept. 30, with the Standard & Poor’s 500 Index posting its biggest quarterly decline since 2008 and the Euro Stoxx 50 Index falling the most in nine years. The indexes advanced in October.

“Through September they did very poorly,” Meyer Shields, an analyst with Stifel Nicolaus & Co., said of the indexes before the earnings announcement. “There’s some concern there.” He has a “hold” rating on Berkshire shares.

The equity derivative bets produced a loss of $2.09 billion in the period, compared with a loss of $700 million in the same quarter a year ago. Credit-default swaps, in which Buffett bets on the solvency of borrowers, declined by $247 million after posting a $519 million gain a year earlier.

Book Value

Book value, a measure of assets minus liabilities, fell in the three months ended Sept. 30 to $96,876 per Class A share from $98,716 on June 30. It was the first sequential decline in book value per share since June 30, 2010.

Buffett sold the equity derivatives to undisclosed buyers for $4.9 billion. Liabilities on the so-called equity-index puts widen when four stock indexes, including the S&P 500 and the Euro Stoxx 50, fall from the levels they were at when Buffett made the contracts near the market peaks in 2006 and 2007. If the indexes are at zero when the agreements expire, the losses would be $35 billion, the firm said in June.

Berkshire Class A shares have slipped 3.9 percent in New York trading this year, compared with the decline of less than 1 percent in the S&P 500. The Euro Stoxx has gained 5.1 percent since Sept. 30, while the S&P 500 advanced 11 percent.

Cash Hoard

Buffett is adding investments as he seeks to draw down a cash hoard that rose to $47.9 billion as of June 30. In the third quarter, Berkshire increased common-stock bets, and spent $5 billion on Bank of America Corp. preferred shares and $9 billion on the takeover of Lubrizol Corp. On Sept. 26, Berkshire announced a plan to repurchase shares.

“The burden of cash is back,” said Thomas Russo, a partner at Berkshire investor Gardner Russo & Gardner.

Berkshire repurchased 15 Class A shares at an average price of about $107,462 from Sept. 26 to Sept. 30. It bought back 227,669 Class B shares at an average price of $71.45. Combined, Berkshire spent about $17.9 million in the period, according to data compiled by Bloomberg.

Berkshire, which doesn’t pay a dividend, announced its first buyback in at least four decades to help spend the $1 billion of earnings Buffett has said his company generates every month. It has more than 70 units that haul freight, produce power and sell goods and services from insurance to carpet. Berkshire said it won’t reduce cash holdings below $20 billion or buy back shares for more than 110 percent of book value.

‘Understated Measure’

“I know that that price is demonstrably less than the businesses are worth,” Buffett said at a conference on Oct. 4. “The book value happens to be an understated measure” of Berkshire’s worth, he said.

Berkshire’s cash was boosted by the termination of financing deals Buffett made during the credit crunch. In April, Goldman Sachs Group Inc. returned the $5 billion it took from Berkshire in 2008, while General Electric Co. repaid its $3 billion last month. The two deals carried coupons of 10 percent, and Berkshire said in May it expects investment income to decline as yields in the market fall.

Berkshire, in preparation for Buffett’s eventual retirement, announced in September the hiring of Ted Weschler, who will join Todd Combs in overseeing a portion of investments. The two money managers, and possibly a third, will take over the portfolio after the departure of Buffett, who is also chairman and head of investments.

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Berkshire Hathaway Inc., the firm run by billionaire Chief Executive Officer Warren Buffett, said third-quarter profit fell 24 percent as derivative bets declined in value. Net income declined to $2.28 billion, or $1,380 a share, from $2.99 billion, or $1,814, a year...
Friday, 04 November 2011 07:29 PM
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