My Take on Buffett’s Acquisition of Burlington Northern (BNI)

As I’m sure everyone knows, Berkshire Hathaway is going to acquire Burlington Northern 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

Full Disclosure:  Author did not hold any position in BNI at time of publication.

Photo credit:  doug_wertman

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