Warren Buffett is about to show how getting one big investment right can overshadow several laggards.
Berkshire Hathaway Inc., the sprawling conglomerate he’s overseen for five decades, is poised to report record quarterly profit on Friday because of a pretax gain of about $7 billion on a stake in Kraft Heinz Co. Buffett helped finance the merger that created the food company and Berkshire became its largest shareholder in July.
The investment is a bright spot in an otherwise challenging year. Berkshire’s shares are down 9.5 percent since Dec. 31. One of its largest units, auto insurer Geico, has struggled with rising claims costs. Its railroad, BNSF, has been spending heavily to restore service and regain market share. And some of Buffett’s biggest stock holdings -- American Express Co., International Business Machines Corp. and Wal-Mart Stores Inc. - - are tanking.
“For a guy whose reputation rests on his investing in the stock market, that’s not good,” said Cliff Gallant, an analyst at Nomura Holdings Inc. “It’s been a tough year.”
Growth has been a challenge for the three main stocks that are slumping in Buffett’s equity portfolio. AmEx lost its biggest co-branding partner, Costco Wholesale Corp., this year and is down 21 percent. IBM has fallen 13 percent as it tries to reinvent itself as a provider of cloud-computing and data- analysis services. And Wal-Mart is off 33 percent after predicting that annual profit would probably decline.
The tumbling share prices probably won’t affect Berkshire’s earnings, as long as Buffett didn’t sell any of the stock. Still, the market declines will put a dent in a metric that the billionaire Berkshire chairman holds dear: book value.
Gallant estimates that the gauge -- a measure of assets minus liabilities -- climbed 3.5 percent in the quarter to $155,000 per Class A share, largely on the gain from Kraft Heinz. Meyer Shields, an analyst at Keefe Bruyette & Woods, sees book value climbing to about $152,000 a share for the same reason. He estimates that Berkshire will post almost $9 billion in net income in the third quarter.
Buffett, 85, has long used book value as a barometer of his performance, aiming to raise the figure over time by more than the Standard & Poor’s 500 Index, including dividends.