Berkshire profit up 14 percent as stocks rebound

NEW YORK (Reuters) - Warren Buffett's Berkshire Hathaway Inc posted its best quarter in nearly two years, as recovering stock markets boosted the value of its equity investments and derivatives bets.

Operating earnings for the second quarter nevertheless fell short of forecasts, reflecting lower underwriting gains, including from the Geico Corp auto insurance unit, and the impact of the recession on Berkshire's more economically sensitive manufacturing and service units.

"Warren hasn't been able to defy the laws of gravity," said Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, which invests more than $3 billion and owns Berkshire shares. "Berkshire's operating companies are not trying to compromise their long-term results. They are taking the hits that come with an economic contraction."

Net income for Omaha, Nebraska-based Berkshire rose 14 percent to $3.3 billion, or $2,123 per Class A share, from $2.88 billion, or $1,859, a year earlier. Earnings had previously fallen for six straight quarters.

Excluding investments, operating profit fell 22 percent to $1.78 billion, or $1,147 per share, from $2.27 billion, or $1,465. On that basis, analysts expected profit of $1,238 per share, according to Reuters Estimates. Revenue fell 2 percent to $29.61 billion.

Berkshire has close to 80 operating units that provide such products as insurance, carpeting, electricity and natural gas, ice cream, paint and underwear.

Results included $1.53 billion of derivatives gains. These were tied mainly to the performance of four market indexes in the United States, Europe and Japan, which rose between 8 percent and 23 percent in the quarter.

The derivatives are a major reason earnings had fallen in recent quarters. Accounting rules require Berkshire to report changes in their value with earnings. Berkshire said the bets will continue to generate "extreme volatility" in earnings.

Book value increased 11 percent from the first quarter and on a per-share basis rose to $73,806 from $66,248. Net income was the highest since the third quarter of 2007 and came on the heels of a first-quarter loss, Berkshire's first quarterly deficit since 2001, Reuters data show.

EQUITY HOLDINGS REBOUND

Berkshire's common stock holdings increased 22 percent from the first quarter to $45.79 billion, reflecting price changes as well the purchase of $350 million of stock.

The company is the largest shareholder of American Express Co and Wells Fargo & Co, whose shares rose a respective 71 percent and 70 percent in the quarter.

Berkshire also ended June with $30.37 billion of "other" investments, including in Dow Chemical Co, General Electric Co, Goldman Sachs Group Inc, Swiss Re and Wm Wrigley Jr Co.

Buffett has become something of a white-knight investor in the financial crisis. Berkshire ended June with $24.51 billion in cash, down from $25.55 billion at the end of March.

"The magnitude of the investments he has been able to make is because of his past discipline, and his credibility," Russo said. "He had to weather a lot of criticism for not making the easy and early bets, but waiting for the big fat pitch."