Paul Price

Burlington Northern: Then and Now

Jan.20
8:37 PM ET

Warren Buffett Buys Over Four Million More Burlington Northern Shares As Price Plunges
Posted By: Alex Crippen

If Warren Buffett liked Burlington Northern Santa Fe in the high $70s, he must love it in the low $60s.

Buffett's Berkshire Hathaway reports in an SEC filing tonight that it bought almost 4.4 million shares in the freight railroad over the last three trading days at prices between $61.65 and $63.43.

Total cost of the 4,363,000 shares comes out to $272.2 million, an average of $62.15 each.

Burlington's stock price has tumbled 25 percent over the past two weeks. It closed at $81.27 on January 6 and finished at $61.25 today, Tuesday.

Berkshire's Burlington Buys - Jan. 2009
Date/Shares Acquired/ Price/Share /Total Price

Thursday, January 15 1,800,000 $62.1922 $111,945,960

Friday, January 16 681,000 $63.4315 $43,196,852

Tuesday, January 20 1,882,000 $61.6529 $116,030,758

TOTAL = 4,363,000 sh.@ $62.15 average price = $271,173,569

The additional stock raises Berkshire's stake to 74,452,029 shares, about 21.75 percent of Burlington's shares. Berkshire continues to be Burlington's biggest shareholder, well ahead of Capital Research Global Investors, which reports just over 19 million shares.

Berkshire's stake topped 20 percent last December, after it bought 2.2 million shares in an options-related transaction. Burlington was in the mid $70s at that point.

In January of 2008, Berkshire bought almost 3 million shares in a series of purchases at prices between $75.51 and $78.18. There was another series of buys just under $80 in the summer of 2007.

Buffett has often said he doesn't get upset when the price of a stock he's bought goes down. If he's still convinced confident about the company's long-term prospects, he sees it as an opportunity to buy more shares at an even lower price.

Current stock price:

Burlington Northern: BNI $61.25 = Jan. 20, 2009 close

Burlington Northern: Then and Now

BNI went up very briefly before dropping to even lower than my lower level target.

By definiton, the advice to sell at around $100 was good (with the shares now in the $63's.

Similarly, people who wrote that tech and internet should be sold in early 2000 looked silly until after March of that year. Saying that they were wrong to call "SELL" because those shares had another few months of glory before collapsing would be equivilent to what you are saying here.

Nobody can can the exact timing of any stock's movement.

Burlington Northern: Then and Now

Dividend Machine,

BNI shares were $99.77 when I wrote it should be sold on April 21, 2008.

BNI closed at $78.45 on Dec. 31, 2008.
It is $63.85 at this moment.

The facts speak for themselves.

Burlington Northern: Then and Now

Burlington Northern - Then and Now
Posted by: Dr. Paul Price
Date: January 13, 2009 06:29PM


Last April I wrote the following article about Burlington Northern:

Blasphemy: Burlington Northern Shouldn't Be Held
By: Dr. Paul Price April 21, 2008

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%.

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.

**********************...

Now, with BNI shares closing today at $66.86 I’m ready to take a position alongside that somewhat well known fellow Mr. Buffett. The shares actually made a new 2 ½ -year low intraday at $65.55 before bouncing back a bit with the overall market.

Berkshire Hathaway owned about 70.09 million shares or 20.47% of the entire company as of December 11, 2008 giving us some indication of his long-term belief in BNI’s prospects. Zack’s now carries estimates of $6.32 and $6.53 for 2008 and 2009 respectively. Both those numbers would represent all time high EPS.

Burlington Northern’s multiple has regressed to about 10.6x last year’s and < 10.3x forward estimates bringing the present valuation to a nice discount to its 10-year average P/E of 14x. The dividend was recently raised to $0.40 quarterly making the current yield 2.39%. That’s the highest rate on these shares in about 8 years.

Value Line calls BNI’s financial strength an ‘A’ while assigning them 85th percentile ratings for both ‘stock price stability’ and ‘earnings predictability’ (with 100th being best).

A return to a more normal P/E of even 13 times 2009’s $6.53 estimate leads me to a $84.90 12-month target price. That’s almost 27% above today’s close. Add in the 2.39% dividend and you could see almost 30% total return by year-end.

Is $84.90 achievable? BNI shares hit highs of $88, $95.50 and $114.60 in 2006-2007-2008 all on lower sales, earnings and book value than today’s comparables.


Want an even lower risk play on Burlington Northern? Consider this:

…………………………………............ Cash Outlay……….. Cash Inflow
Buy 100 BNI @ $66.86 .....……………. $6,686
Sell 1 BNI Jan. 2010 $70 Call @ $9.60 ……….......………….. $960
Sell 1 BNI Jan. 2010 $70 Put @ $14.00 …........……………...$1,40...
Net Cash Out-of-Pocket ………..........………… $4,326

If BNI shares are $70 or higher [up at least 5% from today’s close] on the January 15, 2010 expiration date:

Your $70 call will be exercised.
Your shares will be sold for $7,000.
Your $70 put will expire worthless (a good thing for you as a seller).
You will have collected $160 in dividends (at the current rate).
You will have no further option obligations.

You will have $7,160 for your original $4,326 outlay.
That’s a 65% cash-on-cash gain in this best case scenario.

If BNI shares are unchanged at $66.86 next January 15th:

Your $70 call will expire worthless.
Your $70 put will be exercised.
You will be forced to buy an additional 100 shares for $7,000 more cash.
You will now own 200 shares of BNI total.
Your 200 shares could be sold immediately for > than $10/share gain.

What’s the risk?

On the original 100 shares it’s your $66.86 purchase price less the $9.60 call premium. That’s $57.26 /share.

On the put it’s the $70 strike price minus the $14 put premium = $56 /share.
Your overall break-even is thus $56.63 /share.

While BNI could be trading below $57 next January, it has not changed hands that cheaply since the middle of 2005 (when trailing earnings were only about half of today’s). The dividend back then was also about 50% of the current level.

Disclosure: Author bought BNI shares and sold BNI puts today.

Burlington Northern: Then and Now

The cash inflow and cash outlay chart was mangled by the SA editiors.

Burlington Northern: Then and Now

Please note: Starting with the sentence...

Now, with BNI shares closing at $66.86 ...

was written yesterday.

All references from that point on are current
information and recommendations.

Blasphemy: Burlington Northern Shouldn't Be Held

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.