Berkshire Profit Falls 18 Pct, Hurt by Construction; Company Well Prepared to Replace Buffett.
Berkshire Hathaway Inc. reported an 18 percent drop in fourth-quarter profit as its divisions 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 billionaire CEO Warren Buffett described in his annual letter to shareholders Friday appeared much brighter. The company's net income soared 20 percent as it took on more derivative risk.
Berkshire earned $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 had expected 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 whenever he's no longer able to run Berkshire. 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 job into three parts -- chairman, chief investment officer, and chief executive officer.
The only part that has been clearly spelled out before is the job of chairman. Buffett has said that when he dies, his son will take over the job to ensure Berkshire's culture is preserved. Howard Buffett already serves on the board.
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 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 that Berkshire's board had three outstanding internal candidates for chief executive. And Berkshire's board knows who to choose for CEO and chief investment officer once Buffett can no longer do the job.
Andy Kilpatrick, the stockbroker-author of "Of Permanent Value, the Story of Warren Buffett," said the fact that Buffett still refuses to name the successor candidates suggests that he has no plans to quit. Kilpatrick used a baseball analogy to sum up Buffett's year. "He's hitting singles and doubles," Kilpatrick said. "But that's a lot better than striking out."
And last year Buffett swung more often at derivative pitches that came his way. Buffett said he had accepted $7.7 billion in premiums on 94 derivative contracts by the end of 2007. That's up from 62 contracts at the end of 2006.
Berkshire recorded a $6.9 billion liability for derivatives at yearend. Buffett predicted the derivatives will ultimately be profitable, but he warned they may make Berkshire's earnings more volatile in the future.
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."
Buffett said Berkshire's insurance group, which includes GEICO, reinsurance giant General Re and several other firms, had an excellent year, partly because of good management and partly because of luck. But Buffett predicts that will change in 2008.
"It's a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008," he said. "Prices are down, and exposures inexorably rise. Even if the U.S. has its third consecutive catastrophe-light year, industry profit margins will probably shrink by 4 percentage points or so. "If the winds roar or the earth trembles, results could be far worse."
Buffett said Berkshire generated a $3.4 billion underwriting profit on insurance in 2007, which is down from the previous year when it made a $3.8 billion underwriting profit. Buffett's influence has grown along with Berkshire's book value -- assets minus liabilities -- which soared from $19 per share in 1965 to $78,008 at the end of 2007.
Berkshire owns more than 60 companies, including insurance, clothing, furniture, jewelry and candy companies, restaurants, natural gas and corporate jet firms and has major investments in such companies as Coca-Cola Co., Anheuser-Busch Cos. and Wells Fargo & Co.
Berkshire Hathaway Inc. reported an 18 percent drop in fourth-quarter profit as its divisions 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 billionaire CEO Warren Buffett described in his annual letter to shareholders Friday appeared much brighter. The company's net income soared 20 percent as it took on more derivative risk.
Berkshire earned $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 had expected 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 whenever he's no longer able to run Berkshire. 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 job into three parts -- chairman, chief investment officer, and chief executive officer.
The only part that has been clearly spelled out before is the job of chairman. Buffett has said that when he dies, his son will take over the job to ensure Berkshire's culture is preserved. Howard Buffett already serves on the board.
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 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 that Berkshire's board had three outstanding internal candidates for chief executive. And Berkshire's board knows who to choose for CEO and chief investment officer once Buffett can no longer do the job.
Andy Kilpatrick, the stockbroker-author of "Of Permanent Value, the Story of Warren Buffett," said the fact that Buffett still refuses to name the successor candidates suggests that he has no plans to quit. Kilpatrick used a baseball analogy to sum up Buffett's year. "He's hitting singles and doubles," Kilpatrick said. "But that's a lot better than striking out."
And last year Buffett swung more often at derivative pitches that came his way. Buffett said he had accepted $7.7 billion in premiums on 94 derivative contracts by the end of 2007. That's up from 62 contracts at the end of 2006.
Berkshire recorded a $6.9 billion liability for derivatives at yearend. Buffett predicted the derivatives will ultimately be profitable, but he warned they may make Berkshire's earnings more volatile in the future.
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."
Buffett said Berkshire's insurance group, which includes GEICO, reinsurance giant General Re and several other firms, had an excellent year, partly because of good management and partly because of luck. But Buffett predicts that will change in 2008.
"It's a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008," he said. "Prices are down, and exposures inexorably rise. Even if the U.S. has its third consecutive catastrophe-light year, industry profit margins will probably shrink by 4 percentage points or so. "If the winds roar or the earth trembles, results could be far worse."
Buffett said Berkshire generated a $3.4 billion underwriting profit on insurance in 2007, which is down from the previous year when it made a $3.8 billion underwriting profit. Buffett's influence has grown along with Berkshire's book value -- assets minus liabilities -- which soared from $19 per share in 1965 to $78,008 at the end of 2007.
Berkshire owns more than 60 companies, including insurance, clothing, furniture, jewelry and candy companies, restaurants, natural gas and corporate jet firms and has major investments in such companies as Coca-Cola Co., Anheuser-Busch Cos. and Wells Fargo & Co.
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