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Berkshire Hathaway: A Look Ahead at Third-Quarter Earnings

A true conglomerate, Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) has its hands in everything from brick making to soft-serve ice cream.

Here's what to expect when the company reports third-quarter earnings on Nov. 3, segment by segment.

The rail recovery

Berkshire Hathaway's railroad, BNSF, has seen a notable improvement in rail volumes and pricing so far in 2017, thanks to rebounding commodity prices. As the go-to method for transporting energy commodities, railroad fortunes are driven by commodity prices, coal, oil, and gas prices, in particular.

BNSF's largest competitors, CSX and Union Pacific, have already reported, satisfying investors with earnings growth compared to the year-ago period. CSX reported that higher freight rates helped lift revenue approximately 1%, despite some derailments due to flooding, power outages, and other problems caused by Hurricane Irma.

Coal shipments have already bounced back, boosting revenue and profit for BNSF last quarter. Freight revenue from coal jumped 39.2% year over year to $912 million last quarter. The increases were due to a 20.7% increase in the amount of freight as well as pricing increases on a per-car basis. Favorable trends in commodity prices should remain a tailwind for BNSF.

Image source: Getty Images.

Berkshire's biggest unit

The manufacturing, retail, and services group of businesses has slowly become one of Berkshire's largest, thanks to billion-dollar acquisitions that include Precision Castparts, Lubrizol, and IMC International.

Berkshire Hathaway added another business to this group shortly after the end of the third quarter when it acquired a stake in Pilot Flying J. The truck stop and travel center giant will join one of Berkshire's fastest-growing segments, retailing, which was a standout star last quarter. Berkshire reported in the second quarter that its auto dealerships, home-furnishing stores, and consumer brands Pampered Chef and See's Candies all saw notable increases in their pre-tax profits.

These businesses are most likely to follow the ebbs and flow of the economy and the health of the consumer. It's noteworthy that its "building products" segment within this group has enjoyed double-digit percentage increases in revenue and profit, helped by demand for flooring, roofing, bricks, and paints.

Insurers face storm-related losses

Berkshire Hathaway's insurance units were a drag on its second-quarter results, as its insurers posted a rare underwriting loss due to a $400 million pre-tax loss at Berkshire Hathaway Reinsurance. While there is little reason to worry that its long-term fortunes in insurance are changing, it's likely that the company records higher losses in the third-quarter due to an active hurricane season. (Berkshire's insurance units have generated underwriting profits in every year since 2002, a record that few come close to matching.)

Hurricanes Harvey and Irma are likely to have some impact at GEICO, which, as the second-largest car insurer, is impacted by flooded cars. Buffett told CNBC in an interview that GEICO could have 50,000 complete flooding losses from the roughly 500,000 cars it insures in Harvey-affected areas alone.

But the really big risks -- those that come from the reinsurance businesses -- can be mostly ruled out. Once a billion-dollar business for Berkshire Hathaway, the company has pared back on so-called "super-cat reinsurance" in recent years, fearing that insurers were accepting too much risk for too little reward.

Losses and disasters, as unfortunate as they are, are generally a boon for prudent insurers. Large losses remove capital from the industry, and make it easier for insurers to request rate increases in regulated lines of business, resulting in a double-benefit of less competition and higher prices for those who have the capacity to write more business. Berkshire has plenty of capacity, given it has nearly $100 billion of cash it could move into the insurers should they have a use for it.

A predictable energy giant

Berkshire Hathaway Energy's quarter is unlikely to surprise. This annuity-like business produces profits with regularity, as most of its investments are in regulated utility businesses where profits are protected by local monopolies.

The question for Berkshire Hathaway Energy isn't what it owns or earns today, but how large it can grow in the future. As one of Berkshire's most aggressive acquirers, this unit struck out on a recent acquisition, losing a bidding war for Oncor, one of the United States' largest utilities, when Sempra Energy topped Berkshire's $9 billion offer with a $9.45 billion bid of its own.

Berkshire Hathaway Energy is one of Buffett's favorite ways to deploy billions of dollars in an industry that produces good, but far from extraordinary, returns. With roughly $100 billion in cash, Berkshire has far more investment capital than it has good ideas.

The financial bucket

Berkshire's breadth shows up in its finance and financial products segment, a group that includes a homebuilder, furniture financier, and rail car lessor.

Clayton Homes, which sells manufactured housing, is the star student of Berkshire's finance and financial products segment. In the first six months of 2017, Clayton Homes' revenue popped 16%, and pre-tax earnings rose 7% as home sales have enjoyed a rising tide of new home sales across the United States. The business generates recurring income, thanks to the fact it finances many of its customers, resulting in a steady stream of interest income after a home is sold.

Its transportation and equipment and furniture leasing businesses are both off to a slower start in 2017 than 2016, thanks to declining revenue and higher costs associated with rail car storage and repair.

Ultimately, though, the finance and financial products segment is a mere rounding error in Berkshire Hathaway's results, producing a single-digit percentage of the company's profit.

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Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends CSX. The Motley Fool has a disclosure policy.