Berkshire profit benefits from Buffett shift to rail, energy

Goldman, Mars

Third-quarter net income rose to $5.05 billion from $3.92 billion a year earlier, fueled by gains on holdings tied to Goldman Sachs Group Inc., General Electric Co. and Mars Inc. Operating earnings, which exclude some investment results, were $2,228 a share, missing the $2,403 average estimate of three analysts surveyed by Bloomberg, as insurance underwriting results deteriorated.

Berkshire increasingly has been putting money to work in MidAmerican and BNSF. The two businesses will spend about $8.7 billion on capital projects this year, according to the filing. That compares with $6.9 billion in 2012.

Profit rose at the energy business as it won approvals for rate increases at its largest units, which sell power in states including Iowa, Oregon and Utah. The firm also struck a deal in May to buy Nevada’s largest electric utility for $5.6 billion.

BNSF has benefited as new drilling technologies boosted oil production in states such as North Dakota and Montana. Volume increased 12% for industrial goods in the first nine months of the year because of “significantly higher petroleum products” moving by the company’s rail network, according to the filing. Buffett didn’t respond to a request for comment sent to an assistant outside normal business hours.

Bond Yields

Part of the reason Buffett may be investing so heavily in the utilities and railroad is that bonds yield so little, said David Sims, co-manager of Eagle Capital Growth Fund. While other insurers primarily hold fixed-income securities to back obligations to policyholders and generate earnings, Berkshire has opted to put money in capital-intensive businesses, he said.

“They’re very complementary to the insurance business,” said Sims, whose fund counts Berkshire among its biggest holdings. “They’re a very reliable source of income.”

The businesses also allow Berkshire to deploy large amounts of cash consistently. That’s important because it’s harder for Buffett to make meaningful investments now that his company is much larger than when he took over as chief executive officer more than four decades ago, said Richard Cook, co-founder of Cook & Bynum Capital Management LLC in Birmingham, Alabama.

Heinz Deal

Berkshire’s book value, a measure of assets minus liabilities, was $126,766 per Class A share as of Sept. 30. When Buffett took control in the 1960s, it was $19.

The stock climbed 0.2% to $173,460 at 9:43 a.m. and has gained 29% this year. Berkshire’s largest investment this year was the $12.3 billion Buffett spent to help take ketchup maker HJ Heinz Co. private. The billionaire’s company got half the common equity, and preferred stock paying a 9% dividend.

“People’s expectations should not be that returns are going to be as good as they have been, because there’s so much capital to put to work,” said Cook, who oversees about $295 million, including Berkshire shares. “That’s not a change in Buffett’s skill. It’s a change in the capital base.”

Investing in the railroad and utilities also may have an element of “estate planning,” Russo said. Predictable profits will be helpful in ensuring payouts to the foundations to which the billionaire CEO is leaving almost all his wealth and a boon to his eventual successor, the Berkshire investor said.

Buffett is “starting to play more toward the middle of the tennis court,” Russo said. “The model is changing.”

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