Is anyone else struck by the expensive price Buffett has agreed to pay for BNI? Has anyone calculated the price Buffett is paying for BNI? We can get into calculation details if anyone is interested, but on an enterprise value to free cash flow yield basis, Buffett is getting a little under a 5% FCF yield based on BNI earning about $6 EPS in 2010. If you get aggressive and assume BNI earns $8 EPS in 2011, Buffett is receiving about a 6.5% FCF yield. Just for big-picture reference, there are a lot of bizs currently selling for 6.5% to 8.5% FCF yields...many with LT growth prospects comparable to BNI's.

I can think of a couple caveats that render the price not as important: By using maybe 50% stock in-place of cash, the high price is washed away, but only if you assume Berkshire's FCF yield is equal or lower than BNI's at time of exchange. Also, if BNI's earnings growth rate is greater than Berk's, the deal price makes a little more sense. Finally, Buffett from an early age was fascinated by trains and railroads. Maybe this purchase is more sentimental / personal than his usual (thus price paid wasn't as important to him than all other deals)...a memorable way to put the cherry on top of his life, just in case his deal days are close to an end.

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Makes no sense... I don't understand the attractiveness of BNSF but then again, I never understood why Buffett was buying shares in it over the last few years.

This resembles his Coca-Cola investment: doesn't appear cheap, timing seems weird, etc.

I'm surprised very few are commenting today. There are a lot of value investors on this board but most seem silent today...

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Isn't BNI a large 32,000 mile toll bridge business? Once the track is laid, you don't have to keep replacing it. Also, as the USD$ falls over time due to deficits, price of oil will rise and BNI becomes even more competitive vs trucking. Train transportation business is similar to the gas pipeline business only moving goods instead, with limited competition.

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Charteroak_2000 Wrote: ------------------------------------------------------- > > > Isn't BNI a large 32,000 mile toll bridge > business? Once the track is laid, you don't have > to keep replacing it.



Maybe you don't need to build the tracks again but this is a fairly high capex industry. Maintaining the tracks, traings, cars, etc, is very expensive and needs to be done continuously. In fact, if you listen to that Fox Business interview, one analyst apparently was suggesting last week that rails are overstating earnings (by understating depreciation) and Buffett admitted that's true with long-life assets. So I'm not sure it is as cheap as you are implying.

I agree with you on the notion that this is a toll. As long as the economy does well, they will collect a portion of the wealth. But the question is whether it is worth for that price. Courier companies like FedEx and UPS are also toll roads but why not them (I'll note that these are more exposed to rising oil prices but their business model is solid.)

> Also, as the USD$ falls over > time due to deficits, price of oil will rise and > BNI becomes even more competitive vs trucking.

Yes, you are correct in saying that rails will become more competitive if oil price rises. However, my view is that Buffett doesn't really make speculative macro bets like that. Yes, he rides trends (say, rising consumerism in the 60's to 80's) but I doubt he made this bet based on oil prices (for example, he suggested his COP investment was a mistake and even sold some shares but if he thought oil prices were going higher, COP's share price will skyrocket.)

Besides, even if you were bullish on oil prices, it is doubtful that you can assume that oil prices will rise for the next 50 to 100 years. In other words, it's not clear that oil has all of a sudden become a growth industry, as opposed to a cyclical industry it was for the last 120 years. Buying BNSF is a very long-term decision (you basically own it forever) and you wouldn't bet on cyclical trends. If oil prices rise for the next 15 years, waht happens in the subsequent 35 years after that (let's say BNSF's lifespan is 50 years--I think it's longer but let's assume otherwise.)



> Train transportation business is similar to the > gas pipeline business only moving goods instead, > with limited competition.

I agree that the characteristics are similar but the questoin is price. It's really hard for me to tell what normalized earnings for BNSF are. If we just looking at trailing and forward P/Es, they are both around 17. Earnings may be somewhat low but it's not clear it's a trough (they are much higher than they were at the trough about 5 years ago.)

Even if we assume normalized earnings are higher, it appears that Buffett is still paying a P/E around 14 or 15. That's not exactly cheap.


Obviously I'm missing something. I'm making the arguments that bearish analysts were making of his Coca-Cola purchase in the late 80's. Obviously the analysts turned out to be wrong... very wrong.

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I agree with what Charter is saying - My only quetion is the price paid. Even using optimistic assumptions, on an enterprise value to FCF basis, it appears expensive. In order to make this investment pay better-than-avg returns, BNI's secular growth needs to higher than I'd expect.

Siv, I looked at Buffett's Coke buy and the one thing they have in-common (KO + BNI) was steady, LT growth. However, I notice two dif's. One, the price paid for KO on that same EV to FCF basis was more attractive (something like 6.5% to 7% on current yr earnings, vs. BNI's sub-5%). Second, on what you alluded to, KO's biz is not capital intensive, thus as an owner you get to keep a lot of your earned cash (dividends, buybacks, acquistions). Whereas BNI's maintainence capex is high - something around $1.5 billion per yr (2006 annual report statement), resulting in BNI's owners having to spend a lot of cash profits back into the biz. Interestingly, BNI's stated annual depreciation is around $1.3 bil (somewhat verifies the pt Siv brought up on the an analyst saying BNI understates depre ex).

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good article today from alice schroeder (buffett biogrpher) analyzing the BNI acquisition and other possible motivations for Buffett's future moves :

[www.bloomberg.com]



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bpgamecock Wrote: ------------------------------------------------------- > > >> Siv, I looked at Buffett's Coke buy and the one > thing they have in-common (KO + BNI) was steady, > LT growth. However, I notice two dif's. One, the > price paid for KO on that same EV to FCF basis was > more attractive (something like 6.5% to 7% on > current yr earnings, vs. BNI's sub-5%).


I think both KO and BNI were purchased at similar valuations if you assume BNI's trailing earnings are depressed. Rails did get hit hard last year, especially as commodity shipments and imports/exports declined last year, so if you bump up the earnings a bit it would probably hit KO's purchase price. But, as you touch on, there are some differences. In fact, there is one huge difference.

Although BNI is a monopoly of sorts, it isn't a pure monopoly. If we go back to one of the things Warren Buffett himself has said of monopolies/oligopolies, they control pricing. BNI doesn't have much control over pricing and the economic environment, supply & demand, etc, impacts pricing. In contrast, KO has dominated its core market (and even some related fruit drink markets) and was the undisputed leader for many decades. So, in addition to the key points you raised (i.e. capex, more pure CF available to shareholders), KO is more of a natural monopoly/oligopoly.

Having said all that, as a newbie focusing more on Buffett-style 'buy & hold' strategy, I'm glad he did this deal. It gives me and future investors a good case to study :) He's basically paying up for the strength of the company (in contrast, old-school value investors buy things cheaply but the companies have little competitive strength). This also isn't a distressed company so it isn't complicated to analyze like Geico, Washington Post, etc.

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The trick with Buffett is to ask yourself "why did he do this deal"

Is it about that he thinks gas prices are going through the roof ,once the economy recovers?

What I know is that I "dont know' and what I also know is that he is the only man to make over 100 billion investing.peace

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Thanks fk, that was good.

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I just wanted to add the observation that trucking will become more inefficient over time due to demographics in addition to the falling $ vs increase of oil price (which hurts trucking more than rail). Just think about the retiring baby boomers over the next decade - they aren't just going to stay home, but will be driving all around making the roads even more conjested than now which will impact trucking efficiencies in an increasing negative way vs rail. Demographics will shift more business to rail over time I think.

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