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Coronavirus punishes Warren Buffett as Berkshire Hathaway takes giant write-offs

© Reuters. Berkshire Hathaway Chairman Warren Buffett walks through the exhibit hall as shareholders gather to hear from the billionaire at Berkshire Hathaway Inc.'s annual general meeting in Omaha

From Jonathan stamp

(Reuters) – Berkshire Hathaway (NYSE 🙂 Inc on Saturday announced a $ 9.8 billion write-down and a loss of 10,000 jobs at the Precision Castparts aircraft parts unit as the coronavirus pandemic in the Warren Buffett Conglomerate widespread caused widespread pain.

Despite the write-off, Berkshire said second-quarter net income was up 87% on gains from stock investments like Apple Inc (NASDAQ 🙂 as markets rebounded.

Operating income was down 10%, cushioned by a temporary drag on Geico auto insurer as the pandemic caused "relatively minor to severe" damage to most of Berkshire's 90+ operating companies.

"The write-down was prudent," said Cathy Seifert, equity analyst at CFRA Research. "It's an acknowledgment of what the market has long believed, that the purchase price was rich and that the integration wasn't as smooth as many would have hoped."

Berkshire, which paid $ 32.1 billion for Precision in its largest acquisition in 2016 and which Buffett called a high price at the time, said COVID-19 caused airlines to cut aircraft orders, increasing demand for Precision -Products considerably throttled.

Buffett himself pissed off airlines during the quarter, selling $ 6 billion of their stock and telling shareholders on May 2 that the future of the industry had become "a lot less clear to me."

Berkshire said Precision, which also makes industrial parts, has seen sales decline by a third and is planning an "aggressive restructuring" to downsize operations. Precision finished 2019 with 33,417 employees and cut 30% of its workforce.

During the quarter, Buffett, who turns 90 on Aug. 30, also took advantage of the underperforming stocks of Berkshire by buying back $ 5.1 billion worth of shares, though the pandemic limited the ability of other companies to buy back their own stocks .

Berkshire stock has fared significantly worse than broader markets since late 2018, and Seifert said investors should welcome the buybacks.

"Berkshire tends to go against the grain, and when so many companies stopped buying back, Berkshire did the opposite," she said. "The market should respond positively as it shows that Berkshire is confident of its prospects."

Those buybacks confirmed Berkshire’s notice in a July 8 filing that it had become more aggressive with buybacks after easing its buyback policy in 2018.

PANDEMIC DAMAGE

Berkshire companies affected by the pandemic also include BNSF Railroad, which has seen lower shipping volumes, and retailers, including See & # 39; s Bonbons, which have temporarily closed stores.

Companies that Berkshire has recently made large investments in also have problems.

Berkshire posted a $ 513 million loss on its 26.6% stake in Kraft Heinz Co (O 🙂 after the food company made multiple write-downs, including for Maxwell House and Oscar Mayer.

Occidental Petroleum Corp (NYSE :), where Berkshire invested US $ 10 billion last August, has also been brought to its knees by falling oil prices.

Berkshire's quarterly net income rose from $ 14.07 billion, or $ 8,608 per share last year, to $ 26.3 billion, or $ 16,314 per Class A share. It was followed by a loss of $ 49.75 billion in the first quarter.

An accounting rule requires Berkshire to report unrealized stock gains and losses with net results, creating huge swings that Buffett believes are meaningless.

Second quarter operating income fell to $ 5.53 billion, or approximately $ 3,463 per Class A share, from $ 6.14 billion, or $ 3,757 per share last year.

Sales were down 11% to $ 56.8 billion, although some companies, including Duracell Batteries, grew 16%.

Geico's pre-tax underwriting profit quintupled to $ 2.06 billion because fewer people drove, which resulted in significantly less accidental damage.

However, Berkshire said Geico could suffer underwriting losses for the remainder of the year as it provides $ 2.5 billion in loans to drivers for auto and motorcycle policy renewals.

Berkshire ended June with a record $ 146.6 billion in cash, and bought just $ 797 million in shares during the quarter.

Buffett has since put some cash in, agreeing to buy some Dominion Energy gas facilities for $ 4 billion and add more than $ 2 billion in Bank of America Corp (NYSE 🙂 shares.

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