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The private market value of Burlington Northern Santa Fe (BNI)

October 04, 2009 | About:

There have been several questions as to the private market value of BNI. While it is difficult to put a number on this, Warren Buffett, when buying a business, always ask what is it worth and suggests looking at recent transactions in the industry to get a better understanding.

As mentioned, the industry has consolidated to just seven players so a reasonable effort to value the railroad would be to look at what these players are doing: The Dakota Minnesota & Eastern Railroad Corp. (D,M&E), a division of Canadian Pacific, recently put its $6 billion plan to ship coal in Powder River on hold. DM&E cited weakness in the economy as well as other regulatory concerns.

This is a 278 mile project with a $6 billion price tag, suggesting that each mile is worth over $21 million. Additionally, D,M&E received a $2.5 billion grant from the Federal Government. While it is unknown whether D,M&E will be successful in efforts to build the railroad, these metrics are quite telling as BNI is currently valued at over $1 million a mile, thus highlighting the margin of safety that is so important when making an investment.

With the stock trading around 80, the company is trading at approximately 14x 2010 earnings and 7x 2010 EBITDA. It should generate over $1.2 billion after capital expenditures and will pay out over $500 million in dividends. As mentioned above, the company has generated a healthy 7% cash flow yield for the last decade and used that cash flow in a wise manner – the shares have decreased by over 160 million. As there is weakness in the economy, the company has suspended its share repurchase plan but those who have been following Buffett know that he has made the bulk of his purchase around these prices.

Rating: 3.0/5 (17 votes)


Guruek - 8 years ago    Report SPAM
I am not sure about the "high replacement cost = margin of safety" argument.

Edward Lampert's Sears Holding is another example. Now even Pabrai is regretting buying SHLD based on the real estate argument. Shopping malls are more liquid than railway. I am not saying SHLD is a bad stock, I am saying one has to justify SHLD investment based on going-concern value instead on liquidation value.

These businesses (BNI and SHLD) have to stand on their FCF generation capacity since turning their asset into spendable cash is close to impossible otherwise. Who wants to buy the ten of thousand of miles of land strip along the railway if the railway is not there anymore. Rails, anyone?

On free cash flow yield terms, BNI's 7% is a so-so, compared to a lot of Bruce Berkowitz holdings.

I will buy the "high replacement cost = high moat" argument as it does shield the company from competition, although trucking companies are fairly easy to start, a lot easier than airlines. For that reason, I will give it a low required rate of return, making the 7% FCF yield slightly attractive.

In my opinion, BNI is 80-year WEB stock not a 40-year WEB stock.

In recent years, WEB relied more and more on the operating side of the house to deliver value to shareholders. It seems the primary purpose of his equity portfolio has shifted from wealth creation to maintain stability of the empire. The stable BNI is the vehicle implementation of that strategy.

In conclusion, BNI is a make-a-living stock, not a make-a-kill stock.

Kfh227 - 8 years ago    Report SPAM
In my opinion, this is important:

This is a 278 mile project with a $6 billion price tag, suggesting that each mile is worth over $21 million

But only if BNI were selling at a price that would equate to more than $21 per mile of track.

I agree with Guruek. The way to value a business is to look at FCF. This is the only metric that can be directly compared to the yield on a bond or CD.
Sivaram - 8 years ago    Report SPAM
I agree with GuruEK, who clearly demonstrates the folly in relying on replacement value.

I would also add that private market value, replacement value, or something similar may not be as meaningful if no one would be willing to buy the company. My feeling is that the margin of safety (from buying below replacement value) comes from the fact that someone out there--private wealthy investors, competitors, LBO/private equity--would step in and buy the company if it was cheaper than replacement value. In most big railroads, this probably isn't the case since they are way too big to be easily bought out by a single individual or fund. Competitors are the only hope but they usually run into regulatory problems in this industry so they aren't a realiable buyer either. It's probably valid to look at private market values if it is s small railroad in a strategic area but I doubt the private market value for the big ones can be relied upon.

On an unrelated note, I don't necessarily agree wtih GuruEK that big companies won't make you a lot of money. I think he is right in this case but, in general, it isn't the case. Although largecaps and megacaps generally have low upside potential, if one is a really good at picking off good companies that are undervalued, they can probably do as well as with smaller companies. Usually this requires one to buy distressed large companies (so-called fallen angels,) or to determine future shareholder wealth creation that is not recognized by the market. If we stick with Warren Buffett, I would place something like American Express (in the 60's) as an example of the first; and Coca-Cola (in the 80's/early 90's) as an example of the second. Coca-Cola is quite interesting in that it has generated quite a lot of wealth but it didn't appear cheap when Buffett bought it. If Burlington Northern Santa Fe is like Coca-Cola you can actually outperform the market. I personally don't think it is but I haven't looked at it deeply.

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