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Berkshire’s Manufacturing Could Gain Traction

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Manufacturing growth

Berkshire Hathaway’s (BRK.B) manufacturing investments have reaped benefits over the past few quarters, backed by portfolio additions Duracell and Precision Castparts. The division has continued to strengthen and will likely benefit from reforms such as tax rate cuts. Players in the manufacturing space will likely garner larger market share, at least in the interim, due to cost competitiveness. In 4Q17, the manufacturing sector could see subdued growth due to fewer working days in the quarter, which might be partially offset by retail consumption. Berkshire continues to seek acquisitions in the space, whereas peers BlackRock (BLK) and Goldman Sachs (GS) tend to prefer the service sector, which provides fast growth opportunities.

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Major holdings

Berkshire’s major investments in the manufacturing sector (VIS) include:
  • Lubrizol, a chemical business
  • Precision Castparts, a metal product manufacturer for power, aerospace, and other markets
  • CTB, a manufacturer of industrial equipment for the agriculture sector
  • IMC (International Metalworking Companies), a metal-cutting-tool manufacturer

The division managed 6.1% revenue growth to $12.8 billion in 3Q17, helped by consumer products, industrial growth, Lubrizol, IMC, and Duracell. However, a loss of $190 million on the sale of a bolt-on business resulted in a lower net rise to $2 billion from $1.98 billion in 3Q16.

Retail business

Through McLane, Berkshire engages in retail, a volume-driven, low-margin business. The company saw revenue of $12.8 billion and before-tax earnings of $45 million. Broad markets (SPX-INDEX) have started putting a premium on manufacturing players due to recent reforms and a push for domestic output.

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