March 1, 2008 in Business

Berkshire reports profits down

Josh Funk Associated Press
 

OMAHA, Neb. – Berkshire Hathaway Inc. said Friday its fourth-quarter profit fell almost 18 percent as its companies linked to construction were hurt by nationwide housing woes, and the company generated smaller insurance underwriting profits and investment gains.

But the full-year picture CEO Warren Buffett described in his annual letter to shareholders appeared much brighter. The company’s net income soared 20 percent as it took on more derivative risk.

Berkshire reported earning $2.95 billion, or $1,904 per share, in the quarter. That’s down from $3.58 billion, or $2,323 per share, in the year earlier period.

For 2007, Berkshire earned $13.2 billion, or $8,548 per share, up 20 percent from $11.02 billion, or $7,144 per share, the prior year.

On average, the four analysts surveyed by Thomson Financial have been expecting fourth-quarter earnings per share of $1,606 and annual earnings per share of $6,321.

Berkshire generated revenue of $118.2 billion in 2007, up from $98.5 billion in the previous year.

Buffett said Berkshire gained $12.3 billion in net worth during 2007, which represents an 11 percent increase in the per-share book value of the company. That beat the 5.5 percent gain in the S&P 500’s value over the same period.

On succession, Buffett said his company is well prepared to replace him. But the 77-year-old Buffett did not offer many new details about the company’s plan.

To replace Buffett, Berkshire plans to split his CEO job into two parts: chief executive officer and chief investment officer.

Buffett said that over the past year, he has identified four investment managers outside Berkshire who could take over managing the company’s $75 billion stock portfolio and investing its $44.3 billion in cash. And all four want to work at Berkshire for reasons besides compensation.

“I’ve reluctantly discarded the notion of my continuing to manage the portfolio after my death – abandoning my hope to give new meaning to the term ‘thinking outside the box,’ ” Buffett said.

Buffett has previously said Berkshire’s board had three outstanding internal candidates for chief executive. And Berkshire’s board knows who to chose for both jobs.

Buffett has previously said that when he dies, his son will take over the job to ensure Berkshire’s culture is preserved. Howard Buffett serves on the board.

Buffett said he was managing 94 derivative contracts for Berkshire by the end of 2007, up from 62 contracts at the end of 2006.

Buffett said Berkshire took in $3.2 billion in premiums on 54 contracts that Berkshire will have to pay on if certain bonds default. So far, Berkshire has paid $472 million on those contracts, but Buffett predicted they will ultimately be profitable.

The other derivatives Berkshire has will have to be paid if the S&P 500 and three foreign stock indices are lower when the contract expires than they were when it was written. Those contracts have 15- or 20-year terms, and have generated $4.5 billion in premiums.

Berkshire recorded a $4.6 billion liability for those stock index contracts at year-end.

Buffett said the few companies Berkshire owns that had problems last year were ones tied to housing, such as Acme Brick, Shaw carpet and Berkshire’s real estate brokerage businesses.

“Their setbacks are minor and temporary,” he said. “Our competitive position in these businesses remains strong, and we have first-class CEOs who run them right, in good times or bad.”

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