August 7, 2010 12:06 am

Buffett optimistic as operating profits rise

Warren Buffett’s Berkshire Hathaway group expressed guarded optimism about the US economy on Friday, saying as it reported second-quarter results that it was “hopeful that recent economic improvements will continue over the remainder of 2010 and beyond”.

The group saw operating profits from its businesses climb 73 per cent in the second quarter against a year ago, supported by its acquisition of Burlington Northern Santa Fe railroads and stronger results from both insurance and its NetJets business.

In its regulatory filing, Berkshire said that operating results for many of its manufacturing, service and retailing businesses had improved, “reflecting some stabilisation of economic conditions”.

Berkshire’s net income dropped 40 per cent from a year ago, to $1.97bn or $1,195 per Class A share, as weak global stock markets depressed the value of its derivatives contracts.

However, excluding investments, operating profit rose to $3.07bn, or $1,866 per share, ahead of Wall St’s average forecast.

Berkshire recorded $2.1bn losses on the market value of its derivatives, compared with a $2.3bn profit a year ago, when it benefited from the recovery in global equity markets. The majority of the derivatives are equity index term put options with an average contract life of 11 years.

Credit default swaps lost $320m, compared with a gain of $391m in the year-ago quarter.

Insurance operations, Berkshire’s biggest business, saw operating profit jump 23 per cent to $1.55bn, with underwriting profit increasing seven times to $462m.

The results included $603m of profit from Burlington Northern, after the first full quarter of ownership. Berkshire paid $26.5bn to take full control of the second-largest US railroad, in which it previously held just over 20 per cent, in February.

Burlington Northern’s revenues increased 23 per cent against the quarter a year ago to $4.09bn and delivered pre-tax earnings of $974m. The company said the raised revenues were due to “increased industrial products and agricultural products freight volume over the first six months and stronger consumer products volume in the second quarter”.

Berkshire’s NetJets fractional jet ownership company also reported significantly improved results, with a $57.5m pre-tax profit, after seeing a $252.5m loss in the second quarter last year, as the US economy slumped.

During the company’s annual meeting in May, Mr Buffett praised the performance of NetJets, saying he owed his lieutenant David Sokol “enormous” credit for turning the business round.

Berkshire’s Class A shares closed down $785 at $120,600, and its Class B shares closed down 36 cents at $80.47 in New York.

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