Skeptical About Buffett's Big Bet 26 comments
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The amusing part of Berkshire buying BNI (Burlington Northern) isn't that he's doing it at what looks to be a ridiculous premium to the current stock price (although below the historic high) - it is that he's splitting Berkshire's "B" shares in doing it.
Remember, this is the guy who has maintained forever that stock splits are inherently wrong, in that they're nothing other than a game.
Well, yes. But under the cover of the claim that he wants BNI shareholders to "enjoy" a tax-free exchange, suddenly Berkshire "gets religion" and splits the "B" shares 50:1?
Uh, Warren. This is a stock and cash deal, right? What prevented you from issuing a "C" share? Nothing, other than dilution, which you could handle with an immediate buyback of the outstanding amount necessary to balance it.
Here's my view, for what it's worth - BNI at yesterday's closing price was reasonably valued at a P/E of 14. At the deal price it's about 20. That's too high, unless you believe that manufacturing is coming home in massive numbers, and that "indefinite growth" is coming back.
I think Warren's wrong on valuation. I also think he should have bought BNI back in March, when the stock price was under $51, and paid $70, which would have been an even bigger premium in percentage terms and been a better deal for Berkshire shareholders:
Here's Berkshire's "B" share chart (the "A" is the same, just bigger numbers):
If you're a BNI shareholder, I'd be taking the money - this morning. You're no longer the owner of a big industrial mover; you're now the owner of stock in what amounts to a financial conglomerate trading with a P/E of 52 (as of this morning), where you had a P/E of 14 last night. Worse, Berkshire's market cap is being "invaded" tremendously by this acquisition, turning Berkshire from a financial company (in the main; banking and insurance) into a multi-line conglomerate with a HUGE transportation component.
Mean reversion is going to suck WHEN it occurs, and this much is certain - you didn't own BNI expecting it to have a P/E of 52, but suddenly it does, and anyone who believes that a conglomerate with 25% of it's total market cap comprised of "railroad" should trade at anywhere near a P/E of 52 has rocks in their head.
Buffett's comment: "This is a bet on the future of the country, 5, 10, 20 years from now."
That's Berkshire's and Buffett's mantra, and in addition this is a bet that rails will be the big winner over time in terms of moving products in a world that is increasingly hamstrung by both energy constraints and (in my view insane) "global warming" nonsense.
I think Warren is right on who wins in the transportation matrix in the future, but he doesn't care about multiples.
I, as an investor, do.
If I owned either of these firms (I don't) I'd be a seller this morning into the ramp job, especially if I held BNI. Nobody in their right mind trades a P/E of 14 for a P/E of 52.
Disclosure: No position.
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I fundamentally disagree that he overpaid. What is a business worth with the following traits?
1) Oil goes up (because of demand or even weakening dollar), both their competitive advantage (moat) and their margins both increase, as well as volume as they steal from truckers
2) Much of their business (i.e. coal & commodities) has very very strong margin-of-safety in terms of volumes
3) Oligopoly with just a few players, BNI being the largest. Very very very high cost of entry -- making them defacto market leader indefinitely
You say he should've bought it in March -- but then again, ANY business in the WORLD was undervalued in March. That's like saying "you should've shorted Lehman & AIG in mid-2008". What you did not mention is that the stock was regularly over $100 throughout the last 2 years -- indicating that it is unlikely to be an "insane" premium.
I'm not sure what (if any) value your analysis has, but I'm fairly certain you don't understand why Berkshire is trading where it is now either, quoting items like LTM P/E, irrelevant without taking into account some of the best trades he's ever made in his life in the last year, as well as the derivatives bets he's made reversing their losses (unless the Dow will be below 10,000 in 2019).
The liabilities from the market puts he sold, btw, are the largest reason that LTM earnings look as low as they are. When they reverse themselves, he's likely to book over $8,000/share in earnings in 2010 -- but even if they don't, he's got another 9 years for that trade to work itself out.
Second, there's more to valuation than P/E. What's BRK's cash flow? How's it compare to its GAAP earnings?
Thanks for wasting 2 minutes of my life with this nonsense.
The deconstruction of the split issue, especially.
I see this buy as a speculation, on Buffet's part, as to the nature of the eventual recovery. I happen to think he is wrong. BUT I can be charitable towards a man who feels the need to plan for a future he will not live to see.
AGREE COMPLETELY;DENNINGER HAS NO CLUE ABOUT WHAT BRK REALLY IS AND WHAT WARREN IS ALL ABOUT.
...observer and stockholder in Omaha
On Nov 03 03:57 PM User 174536 wrote:
> This article is senseless. Do you think BNI management would have
> sold the company for $70 back in March? If they have any intelligence,
> the answer is "no".
>
> Second, there's more to valuation than P/E. What's BRK's cash flow?
> How's it compare to its GAAP earnings?
>
> Thanks for wasting 2 minutes of my life with this nonsense.
There's a considerable long-term risk in BNI: The port in Mexico's west coast that is being built, in conjunction with improvements to a railroad line from it to Kansas, that is intended to be a low-cost alternative to high-wage US west coast ports. This could divert a good deal of traffic.
I thought China had lots of coal.
On Nov 03 05:13 PM Roger Knights wrote:
> Why pay a premium and put all your eggs in one basket? Why not buy
> a basket of RRs at market prices?
>
> There's a considerable long-term risk in BNI: The port in Mexico's
> west coast that is being built, in conjunction with improvements
> to a railroad line from it to Kansas, that is intended to be a low-cost
> alternative to high-wage US west coast ports. This could divert a
> good deal of traffic.
>
> I thought China had lots of coal.
I've been waiting to use that line for a long time :-)
What I can not understand is his timing, and his way over-paying for BNI. It's no secret at all that Warren Buffett loves railways. It's public knowledge for more than 2 years, maybe 3 years. He openly talked about his love of railways. So why now? Why not buy in march while the price was much better?
He definitely way over-paid for this thing. I am sure there are tons of other bullish assets way much cheaper to buy , at much better valuation than BNI. If he likes transportation and thinks America is going to export a lot of coal to China, then he should be buying coal mines and he should be buying dry bulk shipppers. Both are dirt cheap now, way much cheaper than railways.
Warren Buffett didn't lose on the big picture. He lost it completely in his valuation calculation and timing.
seekingalpha.com/autho...
Maybe Peter Schiff's comment on Warren Buffett's move is correct.