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Charles (Chuck) C. Carnevale – Co-Founder and Chief Investment Officer, has been working in the securities industry since 1970. He has been a partner with a private NYSE member firm, the President of a NASD firm, and a Vice President, Regional Marketing Director for a major American Stock... More
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  • Berkshire’s Burlington - Vintage Buffett. 0 comments
    Nov 3, 2009 02:08 PM | about stocks: BNI, KSU, CSX, UNP, NSC
    The largest acquisition in Berkshire Hathaway history is, in our opinion, vintage Buffett. The Burlington Northern Santa Fe Corp. (BNI) press release spun it as follows:
     
    “Our country’s future prosperity depends on its having an efficient and well-maintained rail system,” said Warren E. Buffett, Berkshire Hathaway chairman and chief executive officer. ”Conversely, America must grow and prosper for railroads to do well. Berkshire’s $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry.”
     
    “Most important of all, however, it’s an all-in wager on the economic future of the United States,” said Mr. Buffett. “I love these bets.”
     
    When you look at this transaction from the perspective of our Fundamentals-at-a-glance research tool, it makes perfect Buffett sense, especially when compared to other major U.S. railroad companies. Assuming Warren believes what he said above, then Burlington Northern was his clear choice. Of the major U.S. Railroads, they have generated the strongest earnings growth, and therefore, the strongest shareholder returns versus their peers. Figure 1 correlates Burlington Northern Santa Fe’s (BNI) earnings results (green line with white triangle) to their monthly closing stock prices since 1991. Notice how the price tracked earnings and then became undervalued in 2008, based on earnings… a perfect time for Warren to buy.

    (click each figure to expand) 
    Fig. 1. BNI 20yr EPS and Price Correlation
    Fig. 1. BNI 20yr EPS and Price Correlation
     
    In Figure 2, we calculate total shareholder returns, appreciation and dividends since 1991. Note how closely returns correlate to earnings growth.
     
    Fig. 2. (BNI) 20yr Dividend and Price Performance
    Fig. 2. (<a href='http://seekingalpha.com/symbol/bni' title='More opinion and analysis of BNI'>BNI</a>) 20yr Dividend and Price Performance
     
    Figures 3 through 10 repeat this paired information on Burlington Northern Santa Fe’s major competitors.

    Kansas City Southern (KSU)  generated a very low 2.8% earnings growth rate, since 1991.
     
    Fig. 3. KSU 20yr EPS and Price Correlation
    Fig. 3. KSU 20yr EPS and Price Correlation
     
    Based on an overvalued ending price, KSU generated appreciation of 7.9%. However, due to their earnings growth, dividends only totaled $37,075.26.
    Fig. 4. (KSU) 20yr Dividend and Price Performance
    Fig. 4. (<a href='http://seekingalpha.com/symbol/ksu' title='More opinion and analysis of KSU'>KSU</a>) 20yr Dividend and Price Performance
     
    CSX Corp. grew earnings at 6.4%, however notice they were very cyclical since 1991.

    Fig. 5. CSX 20yr EPS and Price Correlation
    Fig. 5. CSX 20yr EPS and Price Correlation
     
    Because CSX started the period more undervalued than they ended the period shareholders enjoyed a 9.4% annualized compounded rate of return, in excess of earnings growth.  The 6.4% earnings growth did generate dividends of $120,524.58.

    Fig. 6. (CSX) 20yr Dividend and Price Performance
    Fig. 6. (<a href='http://seekingalpha.com/symbol/csx' title='More opinion and analysis of CSX'>CSX</a>) 20yr Dividend and Price Performance
     
    UNP generated a 5.2% earnings growth over the period shown below and were also cyclical in nature.

    Fig. 7. UNP 20yr EPS and Price Correlation
    Fig. 7. UNP 20yr EPS and Price Correlation
     
    Shareholder returns correlated very closely to earnings growth, as did dividends.

    Fig. 8. (UNP) 20yr Dividend and Price Performance
    Fig. 8. (<a href='http://seekingalpha.com/symbol/unp' title='More opinion and analysis of UNP'>UNP</a>) 20yr Dividend and Price Performance
     
    NSC Corp. grew earnings at 5.7% and were also cyclical over the years.  Stock prices closely tracked the cycles.

    Fig. 9. NSC 20yr EPS and Price Correlation
    Fig. 9. NSC 20yr EPS and Price Correlation

    Once again, shareholder returns and dividend income correlated to earnings growth.

    Fig. 10. (NSC) 20yr Dividend and Price Performance
    Fig. 10. (<a href='http://seekingalpha.com/symbol/nsc' title='More opinion and analysis of NSC'>NSC</a>) 20yr Dividend and Price Performance
     
    Conclusion
     
    A review of the above information clearly validates that Burlington Northern Santa Fe (BNI) has been the best run major U.S. Railroad, based on earnings growth, since 1991. Therefore, Warren Buffett clearly invested in the best of breed, based on operating results and shareholder returns. Also, by investing during this weakness, he was able to acquire them at a fair price, even though he paid a premium to current value. Therefore, we felt it was vintage Buffett.
     
    Full Disclosure: No holdings in any of these companies at time of writing.
    Themes: transportation, dividends, earnings, Warren Buffett Stocks: BNI, KSU, CSX, UNP, NSC
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