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Buffett Profits from Railroads and Manufacturing

Written By Brian Hicks

Posted September 6, 2012

As the Oracle of Omaha celebrated his 82nd birthday this past Thursday, the underlying question of who will take over Berkshire Hathaway (NYSE: BRK.A) after Warren Buffett was never far from shareholders’ minds.

For the most part, Berkshire is quite healthy; the portfolio comprises around 80 companies, and Berkshire posted profits in excess of $3 billion in the most recent quarter. Class A stock closed at $127,183 last Thursday, which was less than $3 shy of its 52-week high set back in the beginning of August.

Although Buffett’s board has picked an unnamed successor along with two backups, he remains Berkshire’s chairman and CEO today.

Berkshire was always widely known for its focus on insurance. But lately the company has focused on railroad, utility, and manufacturing companies instead.

From Bloomberg:

“The insurance is increasingly more of an engine that runs in the background instead of the driver of the business,” said Jeff Matthews, an investor who wrote “Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett.”

Second-quarter earnings posted earlier this month underscore Berkshire’s steady shift. More than half of all profits were in utilities like MidAmerican Energy (PINK: MDPWK), railroads like BNSF railroad, and other manufacturing companies.

The move away from insurance companies began in 2010, when Buffett acquired Burlington Northern Santa Fe (NYSE: BNI) railroad. Although this shift may make Berkshire more attractive to investors reluctant to dabble in the often-convoluted world of insurance, the core nature of Berkshire Hathaway is unlikely to change, even if their profits change sources.

Of course, insurance companies will remain crucial to Berkshire’s fate due to the risk involved with several major policies written by Berkshire’s reinsurance division. In a deal struck in 2006, for example, Berkshire agreed to cover almost $13.9 billion in potential asbestos claims in exchange for $7.12 billion. In short, insurance is easily the riskiest aspect of Berkshire’s entire business, and as surely as Buffett realizes this, his successor must also bear that in mind.

It is expected that Buffett’s job will be split in three parts after he departs. Although his succeeding CEO will run Berkshire, two others will be in charge of investment. Buffett has said that he wants his eldest son to succeed him as Berkshire chairman.

Regardless of the division, Berkshire’s shift away from insurance in recent years ensures that the next generation will inherit a company whose earnings are much less volatile. Of course, that isn’t accounting for any unexpected big deals Buffett may strike using the nearly $41 billion cash Berkshire has on hand.

Berkshire has major investments in Coca-Cola Co. (NYSE: KO), IBM (NYSE: IBM), and Wells Fargo & Co. (NYSE: WFC), in addition to clothing, furniture, jewelry, ice cream, and private jet companies.