Berkshire Hathaway: The Best of the Conglomerates?
Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Berkshire Hathaway (NYSE: BRK-B) reported first quarter earnings on May 3, and what a quarter it was. Earnings consist of earnings for wholly owned companies, including Geico Insurance, General Re, and See's Candies. Then add to that the many companies in which Berkshire Hathaway has a majority stake, such as leading renewable energy company Mid-American Energy, along with stock price changes of the companies that Berkshire simply holds equity positions in, such as IBM and Coca-Cola. Can Berkshire keep churning out these earnings?
Led by hefty profits in insurance operations, along with gains from a rising stock market, Berkshire Hathaway recorded profits of $4.89 billion, up a stout 52% from $3.25 billion in the first quarter of 2012. The resulting $1.98 per share in the quarter was well above the analysts' projections of $1.35 per share.
Insurance operating profits rose to $1.7 billion in the quarter from $845 million a year ago. The growth in insurance income was almost exclusively underwriting income, as the claims history in the quarter was the best in recent memory. Other income sources generated an additional $2.245 in operating income, which was about 12% higher than was reported a year earlier. Gains were broad based, as everything from railroad income to Berkshire's derivative portfolio performed well.
It is not realistic to expect this sort of quarterly profit bonanza to continue. A nice chunk of Berkshire's $49.1 billion in cash is going to its partial purchase of H.J. Heinz. But given Berkshire's cash generation, more sizable investments or purchases can never be ruled out. As for earnings and valuation, Mr. Buffett prefers to use book value as the more accurate measure of the company's health than earnings. In that vein, Berkshire Hathaway's book value increased by 5.5% since Dec. 31, 2012, to $80.35. At the stock's current price, the company will not be buying back its own stock. I believe the stock price has gotten ahead of itself. I am a long time bull on Berkshire Hathaway, but would rather see an entry point no higher than the mid $90s given today's book value.
As a company, Berkshire Hathaway is unique in that it can either be looked at as a large insurance holding company with many interests outside of insurance, or as a true conglomerate that happens to own several of the nation's largest insurance companies. I prefer the latter. While no company has the size and scope, several other companies bear some similarities. Chief among them is Loews (NYSE: L). Loews owns 89% of CNA Financial (NYSE: CNA), a fully integrated property and casualty carrier. Loews also owns interests in oil and gas drilling and pipelines, and owns nearly 20 upscale hotel properties.
In the first quarter of 2013, Loews reported consolidated profits of $242 million, or $0.67 per share, down sharply from the $367 million, or $0.92 posted in the first quarter of 2012. Analysts had been expecting earnings of $0.71 per share. Revenues were essentially flat with the year ago quarter at $3.73 billion, but a large asset impairment charge at the company's oil drilling unit drove down the bottom line. The offshore drilling and CNA units both performed well.
CNA had a solid first quarter of 2013, despite any residual impacts from superstorm Sandy. Net income was flat with the first quarter of 2012, at $250 million. Modest improvements in the firm's combined ratio were offset by lowered investment yields. I look for strong pricing to persist throughout 2013, helping to drive the combined ratio under 100%. There is little reason to buy this equity, as only 11% of it is in free float.
Looking ahead, Loews Hotels is working to open three new units, and CNA revenues should be on the uptick as renewals after Sandy kick in. Assuming overall insurance losses at historical norms, I expect roughly 10% earnings growth annually over the next several years. This company is controlled by the Tisch family, and debt is just 25% of capital. The problem again is one of value. The stock price has been bid up so that the current PEG is 1.9. That is awfully high for a company whose fortunes are chiefly financial. I would be interested in this equity at its 52 week low of about $25 per share--but count me out at the current price of around $34.
One impressive conglomerate is Dow component United Technology (NYSE: UTX). It struggled in 2012 due to restructuring costs related to its purchase of Goodrich late in 2011. But 2013 shows plenty of promise. Pickups in the domestic construction business will aid the company's Carrier HVAC and Otis Elevator Units. Growth in air traffic will greatly aid United Technology's vast aerospace business. And while the Sirkorsky helicopter division operates in a niche market, it is the dominant player in that market to the tune of $7 billion a year. I look for 2013 earnings on the high side of management's stated $5.85 to $6.15 per share for the year. The company is using its ample generated cash both to pay down debt from the Goodrich deal, and buy back shares. All in all, United Technology, with its 2.3% dividend, should appeal to many holders as a core, long-term choice.
Berkshire Hathaway's stock has gotten ahead of itself. Investors should only consider buying the stock in the mid-$90 range given today's book value. Investors should consider CNA Financial if it dips down toward its 52-week low of about $25, but should avoid it otherwise. Similarly, Loews looks good around its 52-week low of $38. United Technology is a core long-term buy with its 2.3% dividend.
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Bill Edson has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway and Loews. The Motley Fool owns shares of Berkshire Hathaway and Loews. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!