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bnsfAs I’m sure everyone knows, Berkshire Hathaway (NYSE:BRK.A) (NYSE: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

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. 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
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. 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

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. 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

Source: Why Berkshire's BNI Acquisition Is a Great Deal