(Reuters) – Berkshire Hathaway Inc, the conglomerate run by billionaire Warren Buffett, on Saturday said quarterly operating profit rose 67 percent, as insurance underwriting rebounded and several business units benefited from a growing economy.
Results easily topped analyst forecasts. Underwriting profit at the Geico auto insurance unit more than quintupled, the BNSF railroad benefited from demand to ship consumer products, grain, petroleum and steel, and the Berkshire Hathaway Automotive car dealership financed more vehicle purchases.
“Good results across the board,” said Doug Kass, who runs the hedge fund Seabreeze Partners Management Inc in Palm Beach, Florida. He has previously sold Berkshire shares short, betting on a decline, but is not doing so now.
Berkshire also said second-quarter net income nearly tripled, though that reflected a new accounting rule requiring it to report unrealized investment gains with earnings. Buffett says the rule distorts net results and can mislead investors.
Operating profit rose to $6.89 billion, or roughly $4,190 per Class A share, from $4.12 billion, or $2,505 per share, a year earlier.
Analysts on average expected operating profit of $3,387 per share, according to Thomson Reuters I/B/E/S.
Net income rose to $12.01 billion, or $7,301 per Class A share, from $4.26 billion, or $2,592 per share, a year earlier.
Results also reflected a decline in Berkshire’s effective income tax rate to 20 percent from 28.9 percent, following last year’s cut in the federal corporate tax rate.
Berkshire is based in Omaha, Nebraska, and has more than 90 businesses in the insurance, chemicals, energy, food and retail, industrial parts, railroad and other sectors.
Their day-to-day operations are overseen by Greg Abel and Ajit Jain, each seen by investors as a possible successor to Buffett, 87, as chief executive. Buffett and Vice Chairman Charlie Munger, 94, handle major capital allocation decisions.
BITING INTO APPLE
Book value per Class A share, reflecting assets minus liabilities and a preferred measure of growth for Buffett, rose 3 percent in the quarter to $217,677.
Berkshire also ended June with $111.1 billion of cash and equivalents, some of which Buffett could use to repurchase stock under a new policy giving him and Munger more freedom to buy back stock they considered undervalued.
The change reflected Buffett’s inability to find big acquisitions since January 2016, when Berkshire paid $32.1 billion for aircraft parts maker Precision Castparts.
Buffett has not bought back stock in 2018, but has spent money on stocks, and Berkshire said it ended June with a $47.2 billion stake in Apple Inc.
Apple’s share price at the time suggests that Berkshire may have bought about 15 million Apple shares in the second quarter, on top of 239.6 million it already owned.
The iPhone maker this week became the first U.S.-listed company whose stock market value topped $1 trillion.
Berkshire spent $6.08 billion on equities in the quarter. It did not immediately respond to a request for comment.
Class A shares of Berkshire closed Friday at $304,671, or 7 percent below their Jan. 29 peak, while Class B shares closed at $200.24, or 8 percent below their peak the same day.
Insurance underwriting profit totaled $943 million, compared with a year earlier $22 million loss.
Geico’s pre-tax underwriting profit rose to $673 million from $119 million, after it boosted rates in response to rising accident and storm losses.
Float, or insurance premiums collected before claims are paid and which help fund Berkshire’s growth, ended June at $116 billion.
BNSF profit surged 37 percent to $1.31 billion, as economic growth led to more shipments of consumer goods, and demand for fertilizer, grain, petroleum products, plastics, sand and steel.
Profit from manufacturing, services and retailing units rose 29 percent, reflecting demand at Precision Castparts, Berkshire Hathaway Automotive and the German motorcycle accessories unit Detlev Louis Motorrad.
Meanwhile, tax credits for wind-powered electricity generation helped boost profit 14 percent at Berkshire Hathaway Energy.
Reporting by Jonathan Stempel in New York; Additional reporting by Jennifer Ablan; Editing by James Dalgleish
Poland sees bigger state role in economy
By Alan Charlish and Alicja Ptak
WARSAW (Reuters) – Poland’s prime minister set out plans on Tuesday to strengthen the state’s role in the economy and deepen an overhaul of the justice system that has put Warsaw on a collision course with its European Union partners.
Mateusz Morawiecki said the ruling Law and Justice (PiS) party would continue increasing welfare spending and the share of Polish capital in domestic companies, underlining its break with the free-market reforms of liberal governments before it.
“Neoliberals have fueled a sense of confusion in our value system. Many people were led to believe that the state is a ball and chain,” he said in a policy speech to parliament after an Oct. 13 election that gave PiS four more years in power. “Extremes are not good. We are building a normal state.”
Morawiecki spoke repeatedly of a return to “normality”, referring both to PiS’s economic policies and its conservative vision of the traditional family which has won over voters but has been criticized by opponents for encouraging homophobia.
He promised new welfare programs to help families with at least three children and the elderly.
In separate comments, PiS leader Jaroslaw Kaczynski said: “Our society… must be based on the Polish family, the family in its traditional sense. A family which takes the form of a relationship between a man and a woman.”
Opposition lawmakers criticized PiS’s vision of normality.
“The desire for normality means the rule of law and economic prudence, and you break those principles day after day,” said Grzegorz Schetyna, leader of the largest opposition party, Civic Platform.
Morawiecki’s government won a vote of confidence in a late-evening session on Tuesday, with 237 deputies out of 454 lending him their support.
CONCERNS OVER RULE OF LAW
Since returning to power in 2015, PiS has introduced changes to how courts are run and altered some of the rules governing the Constitutional Tribunal and the Supreme Court.
The European Commission, the EU executive, responded by launching legal action over reforms which it says threaten the rule of law and the independence of the judiciary.
The European Court of Justice ruled on Tuesday that it was up to Poland’s Supreme Court to decide on the independence of the Disciplinary Chamber and the National Judiciary Council, offering some criteria on adherence to EU law.
Morawiecki gave no details of the next steps PiS plans to take in its reforms of the judiciary. The party says further reforms are intended to make the court system more efficient but opponents say the reforms made so far have politicized it.
PiS has said it will keep a balanced budget in 2020, benefiting from one-off revenues and fast economic growth, although some economists say such plans are too ambitious at a time when the European economy is slowing down.
(Reporting by Agnieszka Barteczko, Alan Charlish, Joanna Plucinska, Anna Koper, Pawel Florkiewicz and Alicja Ptak; Editing by Timothy Heritage)
Cyclical Stocks That Will Lead as Economy Rebounds
Cyclical stocks are beating the market, and should continue to outperform in 2020 as the U.S. economy rebounds, Goldman Sachs forecasts. Since late August, the S&P 500 is up by 9%, cyclical stocks have advanced by 12%, but defensive stocks have lagged with an 8% gain, per Goldman’s current US Weekly Kickstart report.
“The relative performance of Cyclicals vs. Defensives suggests the equity market is anticipating an acceleration in US economic growth during the coming months,” Goldman says. “Investors who want to capture further cyclical upside can improve risk-reward by narrowing their focus to select cyclical stocks,” they add.
Among the 24 stocks that passed Goldman’s Cyclically-Attractive Risk-Reward screen are these 10, which are expected to post a sharp acceleration in their EPS growth in 2020 compared to the previous year. Goldman for example, forecasts that CommScope Holdings Co. Inc. (COMM) will post 2020 earnings growth that’s 17 percentage points (pp) higher than this year. Other companies include Lincoln National Corp. (LNC), 79 pp higher, Harley-Davidson Inc. (HOG), 38 pp, Urban Outfitters Inc. (URBN), 30 pp, Kohl’s Corp. (KSS), 11 pp, 3M Co. (MMM), 17 pp, MetLife Inc. (MET), 12 pp, Lear Corp. (LEA), 42 pp, Prosperity Bancshares Inc. (PB), 35 pp, and Evercore Inc. (EVR), 18 pp.
- Goldman Sachs forecasts accelerating U.S. GDP growth in 2020.
- They identified cheap cyclical stocks with significant upside potential.
- These stocks are highly sensitive to economic data surprises.
Significance For Investors
Goldman screened the Russell 1000 Index for stocks with high historical share price sensitivity to economic data surprises, but whose current valuations, as measured by forward P/E ratios, are significantly below both their own 5-year averages and the average for the index. Goldman excluded energy stocks, based on their forecast of flat oil prices, and semiconductor stocks, given that shipments have recovered to trend. Among the stocks listed above, Urban Outfitters and Prosperity Bancshares are the most economically-sensitive.
The median stock in the basket has a forward P/E of 11 times projected earnings over the next 12 months, versus a 5-year average of 14 times, and a current figure of 19 times for the median Russell 1000 stock. While the median stock in the basket has a projected EPS growth rate in 2020 of 7%, versus 8% for the median Russell 1000 stock, its growth rate is forecast to improve by 9 percentage points from 2019 to 2020, versus an improvement of only 3 percentage points for the median stock in the index.
Goldman sees signs that the U.S. economy is rebounding, which should give cyclical stocks additional upside. They cite recent positives in non-farm payroll growth, home sales, retail sales, the ISM Manufacturing Index, and the ISM Non-Manufacturing Index. They forecast U.S real GDP to grow by 2.1% in 2020, versus the consensus projection of 1.8%.
Motorcycle manufacturer Harley-Davidson appears to have huge upside, according to Goldman’s analysis. It has a forward P/E of 11 times, slightly below its 5-year average of 12 times. The consensus calls for 21% EPS growth in 2020, up 38 percentage points from 2019. While Q3 2019 revenue was down by 5% year-over-year (YOY) and shipments dropped by 6%, Harley beat estimates and the stock surged, Barron’s reported. About 40% of total bikes sold were overseas, with sales in Asia up by nearly 9%.
Insurance company MetLife has a forward P/E of 8 times, slightly below its 5-year average. The consensus calls for 9% EPS growth in 2020, up 12 percentage points from 2019. Revenue and EPS in Q3 2019 were up 15% and 161%, respectively. Revenues from premiums rose by 5.3%, and total revenues beat the consensus estimate by 14%, per The Wall Street Journal. However, more than half the beat was due to a gain on derivatives contracts used to hedge against lower interest rates.
To be sure, many of these companies have posted poor results in the past few years. And Goldman’s bullish view depends on an imminent economic rebound seen by few other strategists on Wall Street. If Goldman is wrong and the economy stalls or goes south, these stocks will follow close behind.
Lebanon economy skids, jobs in firing line
By Ellen Francis
BEIRUT (Reuters) – Karim Daya was one of the last of his friends and family still in Lebanon. Now that his job is gone, he’s packing his bags.
“That’s it. It’s just getting worse and worse, and where are we headed? Nobody knows,” said Daya, 27, a graphic design graduate. “I’ll be very sad. But there’s no future for me here.”
His feelings reflect the frustration of many young Lebanese caught in the worst economic crisis since the 1975-90 civil war.
The coffee shop chain Daya worked at had struggled even before huge protests, driven by anger at corruption and cronyism, toppled the government last month. The latest turmoil dealt the fatal blow.
He plans to go to Bulgaria, where his sisters live, to look for work – a decision he had tried to put off. But with 37% of Lebanon’s youth already unemployed, the prospects are bleak.
Across Lebanon, banks are closed and business is grinding to a halt.
Beirut’s streets are lined with empty restaurants and shuttered shops. More and more companies have either gone bust or suspended work, firing workers en masse to try to survive.
Employees at 15 companies told Reuters they had been laid off or taken a pay cut in the past month, along with dozens of colleagues.
“This economic choking reached a point where it erupted,” said Pierre Boutros, an engineer who runs a contracting company and a furniture factory. “It’s a miracle that we’ve made it this far.”
He had to cut salaries and lay off dozens of workers in recent weeks. He will likely let more people go. The firm is down to 70 staff, from a peak of 425 people before 2016.
“Credit facilities stopped, there’s no cash…Traders who used to give you time now only deliver if you pay upfront. People don’t have the money to buy. At the end of the day, money is not coming in. We shrank.”
If the crisis drags on, Boutros may freeze work “for a month or two or three until it is solved,” he said. “Then dust ourselves off and get to work again.”
The losses for companies come after years of low growth, government paralysis, regional conflict, and capital inflows from abroad drying up.
Banks, which closed for half of October, have blocked most dollar withdrawals and transfers abroad to avoid capital flight. They shut again this week after a staff strike over safety fears as people demand access to their money.
The hard currency squeeze in turn has stymied trade, pushed people to stash cash at home, and pressured the Lebanese pound’s 22-year-old peg to the dollar.
Business owners say they must make most transactions in cash on the black market, where the pound has weakened to about 20% below the pegged rate. Suppliers now demand payments in dollars or in local currency based on an unofficial rate that changes by the trader and the day.
“We can’t take it anymore. I can’t spend on my children,” said Ali, a sales worker and father of two whose salary was cut in half. “There will be much more chaos if things keep going this way.”
Some families have stocked up on supplies like canned food, rice, and flour. Several people said their bank told them they must repay loans in U.S. dollars.
With a tiny industrial sector and few natural resources, the economy relies on imports and cash injections from Lebanese abroad, which have fallen in recent years, pressuring central bank foreign currency reserves.
Lebanon creates six times fewer jobs than its labor market needs and exports more graduates than any country in the Arab world, a 2019 government study said.
Amale’s three children all work abroad. A 60-year-old nurse, she lost her job at a hospital that laid off 40 people. “They might close down entire floors,” she said. “I cried a bit.”
Majd Chidiac, 23, a copywriter, was also laid off. “The people who haven’t left yet will leave. And those who can’t afford to leave, they’ll get stuck here and get poorer. It’s the sad reality.”
(Additional reporting by Alaa Kanaan and Dala Osseiran; Writing by Ellen Francis,; Editing by William Maclean, Tom Perry, Philippa Fletcher, canadanewsmedia staff)
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