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Why Berkshire’s Services Could See Higher Margins in 3Q17 on NetJets

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Oct. 24 2017, Updated 10:37 a.m. ET

Diversified offerings

Berkshire Hathaway’s (BRK.B) Services and Retail division have expanded at a marginal pace over the past few quarters due to weaker housing finance, but this growth has been offset by jet services, financial services, logistics, and electronics. The division has managed higher margins, with earnings before taxes rising 41% in 2Q17 to $555 million. This trend is expected to strengthen in 3Q17, with higher traction for jet services, electronics, and retail.

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Berkshire has not deployed major money towards e-commerce companies like eBay (EBAY) or Amazon.com (AMZN) and has relied on traditional investments in retail including Wal-Mart Stores (WMT). However, this trend could change, given the indications from Warren Buffett in the recent letters and interviews.

Draggers in the division

In recent quarters, the division has witnessed muted growth due to media, financial services, housing finance, and logistics. Financial services and logistics could see a rebound in 2H17 on higher spending, manufacturing, and retail finance.

Private equity firms (XLF) like Apollo (APO), Carlyle (CG), and Blackstone (BX) have major deployments for services inside and outside of the US in a bid to generate alpha returns. In 2Q17, services contributed $2.8 billion, while retail contributed $3.8 billion toward revenues.

Expectations from retail

Berkshire has retail investments in home furnishings business, trading companies, jewelry retailing, auto dealerships, kitchen tools, and motorcycle accessories. Within retail, kitchen tools, and confectionery are seeing high margins, as reflected in the subdivision’s high growth in profitability.

Retail managed 27% growth in pre-tax earnings in 2Q17, and this trend is expected to continue in 3Q17.

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