Non-insurance business
Much as they have the past few years, Berkshire's noninsurance operations continue to be an added source of stability for the firm. BNSF continues to perform well, despite a slow start to the year (as adverse weather conditions impacted its operations), a sharp drop in crude oil prices during the fourth quarter (which has the potential to impact its transport of crude oil from the Bakken Shale region), and congestion at U.S. West Coast ports (which has had an adverse effect on the railroad's intermodal volume). Fourth-quarter and full-year revenue increased 7.3% and 5.6%, respectively, which is impressive given the slow start to the year at BNSF. Full-year revenue growth (which was better than our forecast of 4.0%) was composed of a 1.8% increase in volume and a 3.5% increase in pricing. We continue to be cautious on BNSF, given the impact that significantly lower crude oil prices, as well as the slowdown at the U.S. West Coast ports, could have on volumes this year. We also believe that price increases will be a bit more difficult to come by, given the drop in crude oil prices (which will for the most part be passed along to customers). The good news for BNSF is that it's unlikely to see a repeat of last year's difficult first quarter, as most of the adverse weather so far during 2015 has been east of the company's main territory.
Berkshire has made up for most of the weakness at BNSF this past year with stronger results from Berkshire Hathaway Energy, which not only benefited from the NV Energy acquisition, but also augmented solid results from PacifiCorp and MidAmerican Energy with stronger than expected results from Northern Powergrid and Berkshire Hathaway HomeServices. Fourth-quarter revenue increased 34.3% and was up 38.2% for the full year, when including the NV Energy deal, and rose 13.0% and 12.5%, respectively, when looking at results on a more comparable basis. Fourth-quarter and full-year pretax earnings were up 99.6% and 50.1%, respectively, on a reported basis, but when excluding the impact of the NV Energy deal were actually down year over year as several of the subsidiaries operating units--including PacifiCorp and MidAmerican Energy--posted declines in pretax profits during the fourth quarter, and the firm's real estate brokerage business continues to spend heavily on "Berkshire Hathaway HomeServices" rebranding activities. With the NV Energy deal closing in mid-December 2013, the company should see more normalized results in the year ahead.
With regards to Berkshire's service and retail operations, which include McLane, Marmon's engineered components and retail technologies units, Iscar, and Lubrizol, the group overall recorded a 3.3% increase in fourth-quarter revenue, with full-year top-line growth at 4.5% (below our expectations of 6.5% for the full year). McLane's full-year revenue growth of 1.5% was lower than our 3.0% forecast, but understandable given the tougher sales environment for its grocery operations. Pretax earnings declined 10.5% when compared with 2013, but the year-ago period did include a pretax gain of $24 million related to the sale of McLane's logistics business. Excluding the impact of that transaction, pretax earnings fell 5.8% to $435 million, reflective of a less-than 1% margin for the business (which is about normal for food and beverage distributors). Berkshire's manufacturing operations reported a 7.3% increase in annual revenue, with pretax earnings increasing 14.4% to $4.8 billion (reflective of a 13.1% margin). Service sales were up strongly last year as well, increasing 9.5% over 2013 levels, while pretax margins held steady at 12.2% (representing a 10.0% increase in pretax earnings year over year). As for the firm's retailing operations, Berkshire saw a decline in pretax margins to 7.8% (from 8.8%) during 2013, despite a 3.1% increase in sales. The earnings declines in 2014 were primarily attributable to lower earnings from Nebraska Furniture Mart (which incurred higher costs related to the buildout of a new store and warehouse facility) and Pampered Chef (which suffered from lower sales year over year).
Results for Berkshire's finance and financial products division, which includes Clayton Homes (manufactured housing and finance), Cort Business Services (furniture rental), Marmon (rail car and other transportation equipment manufacturing, repair and leasing) and Xtra (over-the-road trailer leasing), were also up year over year, but much of this was due to the reclassification of Marmon's transportation equipment manufacturing, repair and leasing businesses from the firm's manufacturing, service and retail operations. Full-year revenue increased 6.8%, and pretax earnings were up 17.6%, with Clayton Homes actually making a significant contribution to pretax earnings (due to lower loan loss provisions on installment loan portfolios, lower interest expense on borrowings, and improved manufacturing results). Earnings from Marmon's transportation equipment manufacturing, repair and leasing businesses were also up strong, with full-year pretax profit up 17.5% when compared with the prior year's period. These results helped offset somewhat weaker earnings from the segment's other finance activities, which include Cort's furniture leasing business, interest and dividends from a portfolio of investments and earnings from a joint venture that Berkshire maintains in a commercial mortgage servicing business.
As we noted above, book value per Class A equivalent share at the end of the fourth quarter was $146,186--up 8.3% year over year and 1.1% when compared with the third quarter of 2014. The company also closed out the period with $63.3 billion in cash on its books. With Buffett liking to keep around $20 billion on hand as a backstop for the insurance business, Berkshire now has an excess cash balance of around $38 billion (with only a small portion of this total dedicated to deals that were announced during the fourth quarter of 2014). The company did not buy back any shares during the past year, but did retire 2,107 Class A shares and 1,278 Class B shares as part of an asset swap transaction with Graham Holdings at the end of June. Given Berkshire's book value per share at the end of the fourth quarter, and the company's current share repurchase authorization, which allows the firm to buy back stock at prices no higher than a 20% premium over book value, Buffett should be willing to buy back stock at prices up to $175,423 per Class A share (or $117 per Class B share), implying a floor on the company's common stock that is about 20% below where shares are trading right now.
