As I’m sure everyone knows, Berkshire Hathaway (BRK.A) (BRK.B) is going to acquire Burlington Northern (BNI) for $100/share. The news was a little surprising to me this morning. I’ve been a little critical of Buffett lately (see my take on his portfolio in the post Is Warren Buffett Still a Value Investor?) but I’ll be the first to admit that he got a great deal here.
The last time I valued Burlington Northern was September 26, 2009, and I calculated a value of $177. The company is strong. It is suitable for the defensive investor, having passed six of the seven tests. The current ratio is the only thing that held it back from a perfect rating.
Burlington Northern has stable earnings and has seen a large increase in earnings per share over the last few years. When looking at normalized earnings (weighted-average), the earnings have increased from $2.06 in 2004 to $5.08 this year and last.
Burlington Northern is a strong company and Buffett has demonstrated his superior prowess as an investor yet again.
Here’s a review of the valuation from 9/26/09:
Defensive and Enterprising Investor Tests:
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary:
- Last updated 9/26/09
- MG Value = $177
- MG Opinion = Undervalued
- Value based on 3% Growth = $74
- Value based on 0% Growth = $43
- Market-implied growth rate = 3.67%
- Net Current Asset Value (NCAV) = -$2.52
- Current Ratio = 0.75
- Price to Book Ratio = 2.31
Key Data:
Balance Sheet – 6/30/2009
- Current Assets $2,579,000,000
- Current Liabilities $3,435,000,000
- Total Debt $9,283,000,000
- Total Assets $37,372,000,000
- Intangible Assets $0
- Goodwill $0
- Total Liabilities $25,521,000,000
- Outstanding Shares 340,000,000
Earnings Per Share – Diluted
- 2009 (estimate) – $4.48
- 2008 – $6.08
- 2007 – $5.10
- 2006 – $5.11
- 2005 – $4.02
- 2004 – $2.10
- 2003 – $2.09
- 2002 – $2.00
- 2001 – $1.87
- 2000 – $2.36
- 1999 – $2.44
Earnings Per Share – Modern Graham
- 2009 (estimate) – $5.08
- 2008 – $5.08
- 2007 – $4.29
- 2006 – $3.61
- 2005 – $2.71
- 2004 – $2.06
Valuation History:
- 9/26/09 – Value $177, Actual Price $80.57, Undervalued & Defensive
- 6/25/09 – Value $184, Actual Price $74.91, Undervalued & Defensive
- 1/9/07 – Value $67, Actual Price $72, Fairly Valued & Enterprising
Disclosure: Author did not hold any position in BNI at time of publication.
Photo credit: doug_wertman
