By Jonathan Stempel
(Reuters) - Berkshire Hathaway (NYSE:BRKa) on Saturday posted its highest ever quarterly operating profit, while gains from stock holdings helped the conglomerate led by billionaire Warren Buffett swing to a nearly $36 billion overall profit.
Rising interest rates, and better results at the Geico car insurer, allowed Berkshire's insurance businesses to generate more money in the second quarter, with profit up 38% and interest and other investment income growing sixfold.
But while operating profit topped $10 billion, those same rising rates have made it more costly to buy and upgrade homes, hurting results at Berkshire's Clayton Homes and building products businesses, and buy RVs from its Forest River unit, where revenue sank 34%.
Profit also fell at one of Berkshire's largest businesses, the BNSF railroad, with a 24% decline reflecting lower shipments of consumer goods, price competition from truckers, and higher pay for employees.
Berkshire also appeared to remain wary of high stock prices as U.S. equities extended their rally.
During the second quarter it sold $8 billion more stocks than it bought and repurchased less of its own stock, and it ended June with a near-record $147.4 billion of cash.
"The story here is interest rates, and valuations of stocks," said Jim Shanahan, an Edward Jones analyst with a "buy" rating on Berkshire.
"The earnings impact of higher interest rates on investment income is offsetting the economic softness caused by those same rates," he added. "And it's clear there aren't a lot of attractive investment opportunities out there."
Investors closely watch Berkshire because of Buffett's reputation, and because results from the Omaha, Nebraska-based company's operating units often mirror broader economic trends.
Those units also include Berkshire's namesake energy company, several industrial companies, and familiar brands such as Dairy Queen, Duracell, Fruit of the Loom and See's Candies.
Buffett turns 93 on August 30. He is worth $117.5 billion and the world's sixth-richest person, Forbes magazine said.
NOT LOVING VALUATIONS
Quarterly operating profit rose 7% to $10.04 billion, or about $6,938 per Class A share, from $9.42 billion a year earlier.
Operating results reflected recent purchases of Alleghany, whose businesses include various insurers and the toy company that makes Squishmallows, and the Pilot truck stop operator, which added $114 million of profit.
Net income totaled $35.91 billion, or $24,775 per Class A share, compared with a year-earlier $43.62 billion loss.
Year-earlier results reflected an accounting change for some insurance contracts.
Berkshire repurchased $1.4 billion of stock in the quarter, down from $4.4 billion from January to March.
It also sold $12.6 billion of stocks, while buying just $4.6 billion. Apple (NASDAQ:AAPL) comprised about half of Berkshire's $353 billion equity portfolio.
"They're not loving valuations," said Cathy Seifert, a CFRA Research analyst with a "hold" rating on Berkshire.
"The quarter was strong, but organic growth trends are not that robust," Seifert added. "The question that will be on investors' minds is how to position the company for strong growth without more frequent acquisitions."
Net results included $25.9 billion of largely unrealized gains from investments and derivatives, which accounting rules require Berkshire to report. This adds volatility to quarterly results, and Buffett urges investors to ignore the fluctuations.
WILDFIRE LOSSES
Geico posted a $514 million pre-tax underwriting profit, its second straight profitable quarter after six quarters of losses, as higher average premiums, fewer accidents and less ad spending offset a decline in policies-in-force.
Overall profit from Berkshire Hathaway Energy, where Berkshire has a 92% stake, was little changed at $785 million.
But the company said it faces a potential $1.02 billion of pre-tax losses, or $608 million not covered by insurance, at its PacifiCorp electric utility unit tied to a series of Oregon wildfires in 2020.
An Oregon jury in June found PacifiCorp liable to homeowners for negligence after failing to shut down power lines that caused four fires. PacifiCorp plans an appeal.
Results also included profit attributable to Berkshire's 25.3% stake in Occidental Petroleum (NYSE:OXY).
Berkshire also owns $8.8 billion of Occidental preferred stock, which throws off an 8% dividend, though the oil company has redeemed some of the original $10 billion it issued.
The Class A shares of Berkshire closed Friday at $533,600, about 2% below their record high. They are up 14% this year, while the Standard & Poor's 500 has risen 17%.