Company Review – Burlington Northern Santa Fe

Company Profile: Burlington Northern Santa Fe Corporation (BNI):

Business and Management Review
1) Is the business simple and understandable?

Burlington Northern is in the business of rail transportation and they earn their revenue from the fees generated for these services. The business is simple as they market themselves to earn the business, load the trains, move the trains, and deliver the product where desired.

2) Does the business have a consistent operating history?

Railroad transportation has a long history as it was the first mass transport service before airlines, or highway freight existed. The business has taken time to purchase the rail lines they operate, therefore, saving costs by not leasing line space from other rail companies.

3) Does the business have favorable long term prospects?

Although both air and highway transportation is a quicker way to move merchandise, the rail system still has positive prospects. Railroads will continue to move large amounts of items, and single items that are too large to move by other methods. We feel that this industry will continue to attract a segment of the customers in this market, and will thrive as long as they stick to their business line and not deviate too far.  

4) Is management rationale?

We find no reason to suspect that management is not rationale in their decision making process. Growth rates of sales, income, and dividends have been attractive in comparison to industry averages. The company holds little debt in regards to overall equity and we feel that the firm is not over leveraged.

5) Is management candid with its shareholders?

The company has an extensive investor relation page that answers both general and detailed questions an investor might have.

6) Does management resist the institutional imperative?

There is no reason to be concerned about management within Burlington Northern. They seem to be acting rationale and in the best interest of their shareholders.

Financial and Value Review
Defensive:

1) Size of firm

Coming in at about 26 billion in terms of market capitalization, BNI passes the test of being over 2 billion.

2) Strong financial condition

With a current ratio of about 0.58, the company falls short of the 2.00 requirement in order to pass this test.

3) Earnings stability

Burlington has had positive net income for the prior ten years, and therefore, passes this test.

4) Dividend record

There has been consistent dividend payments over the past ten years and passes this test for the defensive investor.

5) Price to earnings analysis

With a P/E ratio of over 26, the company fails the test of having a ratio below 20.

6) Price to assets analysis

With a P/B above 2.5 the company fails this test as well, although barely as the ratio stands around 2.8.

Conclusion:

Based upon our valuation for the defensive investor, Burlington Northern does not pass the test.

Enterprising:
1) Strong financial condition

The current ratio is not above 1.5, and thus does not pass for the enterprising investor as well.

2) Earnings stability

The company has had positive net income for the past five years which allows the company to pass this test.

3) Dividend record

Burlington Northern currently pays a dividend and as such passes this test.

4) Earnings growth

Earnings for the company are greater than five years ago, therefore, the company passes this test.

Conclusion:

Based upon our valuation for the enterprising investor, Burlington Northern passes the test of being attractive for this type of investor.

Valuation:

We find a fair market price to be around $67 for Burlington Northern.

Opinion:
Given the current (1/9/07) share price of about $72 our valuation recommends holding this security. However, seeing that it passed our test for the enterprising investor, we would be comfortable placing this stock in their respected portfolio.

Neither of us held a position in BNI at the time of publication.  Also, please read our disclaimer and Our Methods.

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