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How Valuable Are Berkshire’s Non-Insurance Subsidiaries?

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Berkshire’s non-insurance subsidiaries

In Warren Buffett’s 2018 annual letter, Berkshire Hathaway’s (BRK-B) chairman termed the “many dozens of non-insurance businesses that Berkshire controls (usually with 100% ownership and never with less than 80%)” as the company’s “most valuable grove.” Last year, the businesses earned $20.4 billion in pre-tax income. The metric increased 24% compared to 2017. The acquisitions that Berkshire Hathaway completed last year contributed nominally to that figure.

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2018 earnings

BNSF and Berkshire Hathaway Energy earned $9.3 billion pre-tax last year—a year-over-year rise of 6%. The other major contributors were Clayton Homes, Precision Castparts, Lubrizol, Marmon, and International Metalworking, which collectively earned $6.4 billion pre-tax last year. Given the limited disclosures provided by Berkshire Hathaway about its operating subsidiaries, investors can’t pinpoint whether any of these subsidiaries are dragging Berkshire Hathaway’s 2019 performance.

However, looking at these businesses, BNSF is a railroad company. Railroad stocks have outperformed the S&P 500 (SPY) this year. As for Berkshire Hathaway Energy, utility stocks have underperformed. Precision Castparts, which Berkshire Hathaway acquired in 2016, supplies products to aerospace companies like Boeing (BA). The aerospace component space has seen some turbulence over the last three years. Aircraft manufacturers moved to newer platforms, which hurt companies like Arconic. The issues with Boeing’s 737 Max series might also be impacting the aerospace component space.

Looking at Berkshire Hathaway’s non-insurance subsidiaries, we don’t see any aspect that could be driving the stock’s massive underperformance compared to the S&P 500.

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