Pandemic punishes Warren Buffett as Berkshire Hathaway takes big writedown

Warren Buffett¬†has also taken advantage of Berkshire’s underperforming shares by repurchasing stock. (Reuters pic)

OMAHA: Berkshire Hathaway Inc on Saturday announced a US$9.8 billion writedown and 10,000 job losses at its Precision Castparts aircraft parts unit, as the coronavirus pandemic caused widespread pain at Warren Buffett’s conglomerate.

Despite the writedown, Berkshire said second-quarter net income surged 87% because of gains in stock investments such as Apple Inc as markets rebounded.

Operating profit fell 10%, cushioned by a temporary bump at the Geico auto insurer, as the pandemic caused “relatively minor to severe” damage to most of Berkshire’s more than 90 operating businesses.

“The writedown was prudent,” said Cathy Seifert, an equity analyst at CFRA Research. “It’s a recognition of what the market has long believed, that the purchase price was rich, and the integration not as smooth as many would have hoped.”

Berkshire, which paid US$32.1 billion for Precision in 2016 in its largest acquisition, and which Buffett at the time called a steep price, said Covid-19 caused airlines to slash plane orders, significantly curbing demand for Precision’s products.

Buffett himself soured on airlines during the quarter, selling US$6 billion of their stock and telling shareholders on May 2 the industry’s future had become “much less clear to me”.

Berkshire said Precision, which also makes industrial parts, saw revenue fall by one-third and plans an “aggressive restructuring” to shrink operations. Precision ended 2019 with 33,417 employees, and has shed 30% of its workforce.

During the quarter, Buffett, who turns 90 on Aug 30, also took advantage of Berkshire’s underperforming shares by repurchasing US$5.1 billion of stock, even as the pandemic reduced other companies’ ability to buy back their own shares.

Berkshire’s stock has significantly underperformed broader markets since the end of 2018, and Seifert said investors should welcome the buybacks.

“Berkshire tends to go against the grain, and when so many companies suspended buybacks, Berkshire did the opposite,” she said. “The market should react positively, because it shows Berkshire is confident in its prospects.”

Those repurchases confirmed Berkshire’s hint in a July 8 regulatory filing it had become more aggressive with buybacks after loosening its buyback policy in 2018.

Pandemic damage

Berkshire businesses suffering from the pandemic also include the BNSF railroad, which saw lower shipping volumes, and retailers including See’s candies that temporarily closed stores.

Companies in which Berkshire recently made large investments have also been struggling.

Berkshire recorded a US$513 million loss on its 26.6% stake in Kraft Heinz Co, after the food company took several writedowns including for Maxwell House and Oscar Mayer.

Meanwhile, Occidental Petroleum Corp, where Berkshire invested US$10 billion last August, has also pummeled by sinking oil prices.

Berkshire’s overall quarterly net income rose to US$26.3 billion, or US$16,314 per Class A share, from US$14.07 billion, or US$8,608 per share, a year earlier. That followed a US$49.75 billion first-quarter loss.

An accounting rule requires Berkshire to report unrealised stock gains and losses with net results, causing huge swings that Buffett considers meaningless.

Second-quarter operating profit fell to US$5.53 billion, or about US$3,463 per Class A share, from US$6.14 billion, or US$3,757 per share, a year earlier.

Revenue fell 11% to US$56.8 billion, despite gains in some businesses including Duracell batteries, which rose 16%.

Geico’s pretax underwriting profit increased fivefold to US$2.06 billion because people drove less, resulting in significantly fewer accident claims.

But Berkshire said Geico could suffer underwriting losses for the rest of the year, as it awards drivers US$2.5 billion of credits on auto and motorcycle policy renewals.

Berkshire ended June with a record US$146.6 billion of cash and equivalents, and bought just US$797 million of equities in the quarter.

Buffett has since deployed some cash, agreeing to buy some Dominion Energy gas assets for US$4 billion and adding more than US$2 billion of Bank of America Corp stock.