When thinking about the performance of Berkshire Hathaway (BRK.B,BRK.A) and its famous CEO Warren Buffett, we are reminded of an apocryphal quote about Detroit Tiger Hall of Famer Ty Cobb. When Cobb was asked why he could only hit for a .290 batting average against modern pitchers when he hit for a career record .366 batting average over his 24-year career, Cobb stated it was because he was 72 years old. That’s how we see Warren Buffett and Berkshire Hathaway. We don’t see Buffett, Combs and Wechsler repeating the 19.8% returns Berkshire enjoyed from 1964-2011 due to its size and the fact that it has already bought up many of the most desirable investment opportunities out there. However, we think that Berkshire will continue to chug along to solid growth and performance as if it was one of its Burlington Northern Santa Fe railcars. We were particularly impressed with the performance of BNSF, which generated the best combination of revenue and profit growth recently and was within $76M of overtaking Berkshire’s insurance operations as its most profitable business for the quarter. Berkshire generated nearly $7.2B in increased book value during the period, which resulted in a 4.07% increase in book value during the quarter. Berkshire’s share price is now trading at a 17% premium to its book value.
Burlington Northern Santa Fe
BNSF saw solid performance during the quarter and year to date. BNSF Q3 2012 revenues increased by 8% versus the prior-year period and 8% year-to-date versus H1 2012 levels. Q3 revenue growth was due to increased volume for consumer products (4% volume growth) and industrial products (14% growth) coal volume (4% growth) and agricultural products (3% growth). Industrial products volume increased primarily as a result of increased shipments of petroleum products, as well as increased sand shipments. We believe that Buffett’s opposition to the Keystone Pipeline helped ensure that BNSF would be able to benefit from the fracking activity in the Bakken formation. BNSF increased its railroad car volume by 5% year-over-year in Q3 and its revenue per car by 2% even when taking into account 4% reduction in fuel surcharges. BNSF enjoyed positive operating leverage which kept costs from rising by 2.65% in the quarter and 4.2% for YTD 2012. This positive operating leverage enabled the division to generate 22% profit growth in the quarter versus the comparable quarter last year.