Blasphemy: Burlington Northern Shouldn't Be Held

Go ahead and attack the thought. Sell a Buffett stock? Am I nuts?

Read this and you decide.

Berkshire Hathaway started reporting buys in Burlington Northern (BNI) a year ago in early April 2007 with 1.646 million shares for an average price of about $81.37/share. Buffett and Berkshire bought quite a few times after that by averaging down. Their last reported purchase was on January 22 at a price of $75.51 /share.

At today's price of $99.77 these shares now trade at 16.8x estimated 2008 earnings of $5.90 - $6.00 and about 14.7x 2009 estimates of $6.75 - $6.80. The current yield on BNI shares is a historically meager 1.28%.

Here are statistics* from the past 10 years for BNI (click chart to enlarge):

Burlington Northern Santa Fe Corp: Key Ratios

* Source: MSN MoneyCentral

Value Line lists Burlington Northern's 10-year median P/E as 14x and MSN MoneyCentral's 10-year average P/E calculates to 14.13x. If BNI shares retreated to even 14.5 times this year's consensus view of $5.95, the shares would drop back to $86.28.

If BNI shares regressed to a [still higher than typical] 1.5x projected 2008 sales, the shares would decline to $74.95. At a higher than normal 2.4x book value BNI shares would be $86.16 at year-end 2008.

The yield is now near the all-time low of just 1.2% even after the rise to $0.32 quarterly. For the current dividend to return to a more typical 1.5%, the shares would need to dip back to $85.33.

Is Burlington Northern a good company in a favored industry group? Yes. Are BNI shares likely to be higher at year end 2008 than today? I doubt it.

Burlington Northern is riding the 'Buffett effect' and the tailwinds of the commodities frenzy right now. This seems to be more than fully reflected in its valuation.

I see much more risk of a share price decline back to $75 - $88 than a move up to $110 or better.

Go ahead and blast me but I feel strongly there are much better places for your investment dollars from now through December.

Comments

[Yeah Right:]

Maybe Buffett knows something we don't ?
Maybe with oil and gasoline spiking higher, trains will suddenly look like a smart invest. Just a thought...

2008 Apr 22 01:31 AM

[Nate C:]

You don't make money betting against Buffett. He is always right (except for the US Air deal) so why fight him. I agree that BNI has had a nice run lately and might pull back, but long-term this stock is going higher.

2008 Apr 22 01:39 AM

[Paul Price:]

Buffett did not sell Coca Cola in 1989 at $89.45 and watched it go down by more than 50%. Years later it still trades well under its overpriced levels from then.

BUD is now a multi-year BRK holding that is well under his cost. Even Buffett makes mistakes when he refuses to sell when shares get overpriced.

2008 Apr 22 08:37 AM

[SA User:]

You, sir, have guts. It was a pleasure to read. I am with you and recently sold my BNI shares for a modest short-term gain. The we-worship-Buffett mentality is getting old, but even if you want to follow his every move, he hasn't touched this stock above the very low 80's.

2008 Apr 22 09:27 AM

[UncleLongHair:]

The crux of your article seems to be that BNI will revert to a former valuation multiples. I think you should spend some time examining how BNI's business is different today than it was 5 or 10 years ago. Companies that go through a positive business transformation typically experience multiple expansion, not multiple contraction. There are very good reasons why BNI's business is stronger today than 10 years ago, which will result in better performance as measured by things like ROIC, ROE, etc. which will lead to higher multiples to book, sales, and earnings.

2008 Apr 22 09:58 AM

[John M.:]

I have been attending State Department of Transportation Conferences for the last several years. The message is the same whether it is from Texas or Tennessee. The demand for all modes of transportation will either double or triple by 2020 (12 years from now). This is just to meet every everyday demand required to keep our nation growing population fed, clothed and housed.

Reality is that that the nation's infrastructure is not ready to meet tomorrow's increased freight demand. This situation is just as serious as Global Warming or the high cost of oil, but no one wants to admitted it.

Some modes will be better suited than others to meet this demand. Adding additional rail infrastructure will be much less costly than that of new or expanded highways or inland marine waterways. Rail is more fuel effective and greener than trucks. Nevertheless trucks are still required. It is felt that there will a large shift to multi-modal solutions. Trucking will be used for local pick-up and delivery, while rail will be used (inter-modal or trans-load) for longer distance movements. Nevertheless, rail percentage of the nation's total freight shipments will increase while truck will decrease.

2008 Apr 22 10:16 AM

[Charles Pie...:]

With oil going to $200 per barrel, long distance truckers are toast. Railroads will ride high again, as the only cost-effective way to move containers from port vessels to destination cities. Even UPS and FedEx ground will soon be forced to make use rail transport, in lieu of their own cross-country fleets.

2008 Apr 23 12:01 PM

[Charles Pie...:]

Regarding what Warren Buffet knows that we don't - actually, it's public information. The Panama Canal is undergoing a major expansion program. Today, only small container ships less than 4400 TEU's can transit the canal. As a result, almost 90% of goods imported from Asia (which is the bulk of what America imports) are brought into Los Angeles and Long Beach harbors, then unloaded. Containers are trucked cross country since Los Angeles long ago allowed its rail system to fall into disrepair. In five years (mid 2013), container vessels of 12,000 TEU capacity will flow through the enlarged canal and unload in New Orleans or East Coast ports. Combine oil at $150 to $200 a barrel in 2013 with easy access to railroads and you see a dramatic shift in how imported goods are distributed. To verify what I've said, go to pancanal.com and look at the 2007 expansion plans report. It's buried a few clicks down, but worth finding.

2008 Apr 23 12:23 PM

[bearfund:]

What are you talking about, Charles? UPS already uses rail, has for a long time. And in fact they are a major BNI customer. Not only that, BNI does plenty of business on their Sunset route, which connects LA with the east via BNI's southern "Transcon" routing. That alignment is highly favourable, especially if you like the population growth story along that corridor, and it is not "in disrepair"; BNI has been actively upgrading that route in many locations. And, yes, intermodal traffic is heavy on that route, including inland runs from LA (if you don't believe this, park your car in the Cajon Pass on I-15 and watch the trains go by on UP and BNSF trackage).

You seem to be bullish overall on rail transport, and I agree. Trucking is dead with oil above $100, and railroads and ships will be the beneficiaries. That said, I agree with the author that BNI is overpriced. Buffet's entry points in the low 80s look good to me, and I would buy anywhere below 85. Until then, I like CNI, which also does good and growing intermodal business at Prince Rupert, has a good Canadian commodity story, is cheaper relative to earnings, and offers a better yield. The downside risks are bad winter weather that kills Q1 earnings seemingly every year and regulatory meddling. Picking up CNI anywhere below 50 is a smart move.

2008 Apr 24 11:23 AM

[truthinvesting:]

actually i have sold covered calls on this stock but am commenting because in December this same person who thought CFC was abargain at 30 said i was paying too much for BNI when it was 81. My point is not that stock is under or overvalued ,but that the author thought it was at 81 when he was clearly mistaken

2008 Jun 01 12:49 PM