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Berkshire Hathaway’s Service and Retailing Segment under Pressure

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Services and retailing

In 2016, Berkshire Hathaway (BRK-B) sold some of its shares in AT&T (T) and deployed funds in Wells Fargo & Company (WFC). The company’s revenues from its service and retailing division rose to $5.9 billion in 1Q16, as compared to $4.5 billion in the prior year’s corresponding quarter.

The division’s profits declined to $324 million from $384 million during the same quarter of 2015. Berkshire’s service and retailing division is one of its most profitable. However, profits declined primarily due to services, but this decline was partially offset by an increase in the retail category.

Revenues in this division climbed to $5.9 billion, as compared to $4.5 billion in 1Q15. Berkshire Hathaway reported an operating margin of 14.4%. By comparison, its competitors reported the following operating margins:

  • American International Group (AIG): 15.5%
  • MetLife (MET): 13.7%
  • Allstate (ALL): 11.9%

Together, these companies make up 6.5% of the Financial Select Sector SPDR Fund (XLF).

Financials rebound after weak performance

Berkshire Hathaway’s major subsidiaries in this segment include the manufactured housing builder and financier Clayton Homes, the transportation equipment manufacturing and leasing businesses UTLX and XTRA Lease, and other leasing and financing businesses. XTRA owns and leases over-the-road trailers. UTLX manufactures, owns, and leases railcars, intermodal tank cars, and cranes.

In 2016, Berkshire Hathaway bought 9.4 million shares of Wells Fargo, the company’s largest holding, bringing its total investments above $26 billion. In 1Q16, the company’s finance division reported a rise in revenues to $1.7 billion, mainly due to higher home unit sales. The division’s pretax earnings rose to $478 million from $444 million in the prior year’s corresponding quarter.

Aviation, electronics, and multimedia

Berkshire Hathaway operates many subsidiaries in the service and retail industry. Its major businesses include NetJets, a provider of fractional ownership programs for general aviation aircraft, and FlightSafety International, a provider of high-technology training for aircraft operators. The following are some of its other businesses:

  • TTI, an electronic components distributor
  • Business Wire, a distributor of corporate news, multimedia, and regulatory filings
  • Dairy Queen, which licenses and services a system of over 6,500 stores that offer prepared dairy treats and food
  • Buffalo News and the BH Media Group, which include the Omaha World-Herald, 28 other daily newspapers, and numerous other publications
  • WPLG, which operates a television station in Miami, Florida

In the final part of this series, we’ll evaluate Berkshire Hathaway’s recent stock price movement and valuation.

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