We are downgrading our recommendation on the shares of
Berkshire Hathaway Inc.
) to 'Neutral' from 'Underperform', following the company's
lower-than-expected earnings. Despite the miss, overall results
reflected strong performance across all the business segments -
Insurance, Railroad, Utilities and Energy, Manufacturing, Service
and Retailing as well as Finance and Financial products.
BERKSHIRE HTH-A (BRK.A): Free Stock Analysis
BERKSHIRE HTH-B (BRK.B): Free Stock Analysis
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Berkshire has grown over the recent decades by making numerous
acquisitions. At present, the company has over 80 operating
subsidiaries under it. These subsidiaries are operated as
independent entities with respective managers responsible for
Berkshire's property and casualty insurance business has been the
key driver of growth. Its insurance and reinsurance businesses,
such as Geico, have been positively contributing to the company's
profits for a long time. Its insurance units generate strong
"float", which is invested by the Chairman and CEO, Warren
Buffet. Float represents funds that are held by an insurance
business during the period when policyholders submit payment and
funds are eventually paid out to settle claims. The insurance
business maintains capital strength at exceptionally high levels.
This strength differentiates Berkshire's insurance companies from
the competitors - Assurant Inc. (AIZ) and Reinsurance Group of
America Inc. (RGA).
Berkshire's economically sensitive non-insurance businesses -
utilities & energy, and manufacturing, service & retail -
are also performing impressively after suffering from the weak
economy in 2009. The utilities and energy business is witnessing
strong growth with increased revenues from BNSF, the railway
which was acquired in February 2010. The segment accounted for
more than 50% of the second-quarter profits. Although some units
are dragged down by a weak economy, overall the company is
performing quite well.
However, Buffett's succession is the biggest matter of concern
for the company's shareholders at this moment. He is already in
his eighties and has been suffering medical complications.
Buffett announced that a competent successor has been chosen, but
the identity remains undisclosed. Nevertheless, there is an air
of uncertainty about the performance of the company under the new
CEO. In our view, the new management may find it
challenging to enable the company to perform like it does under
Buffett and Munger.
The stock retains a Zacks #3 Rank, which translates into a
short-term Hold rating.