Saturday, January 2, 2010

Buffet in Santa Fe

Berkshire Hathaway, the company run by Warren Buffet is a conglomerate holding company based in Omaha Nerbraska. The company has holdings in a wide variety of businesses such as insurance (GEICO),retail, home furnishings, jewelry sales, newspaper publishing, as well as several regional electric and gas utilities. Berkshire has major investments in major corporations such as beverage giant Coca-Cola and US bank Goldman Sachs. Berkshire Class A shares are currently trading at $103,250.00 (US) and BNI is currently trading at $98.10 (US) (At Nov 20th, 2009).

Berkshire agreed to buy the stock that it does not already own in Burlington Northern Santa Fe (BNI). It had originally made a purchase of BNI’s stock in Jan of 2009. BNI is the second largest U.S. railroad company with over 6,300 locomotives and over 32,000 miles of routes. The company transports freight, such as coal and agricultural products, throughout the western United States. The deal was roughly for $26bn in cash and stock. (http://news.bbc.co.uk/2/hi/business/8349065.stm) Burlington has one major railway competitor, Union Pacific. After Berkshire acquired BNI the stock price went from $75 to $95, a 27% increase, on November 3rd.

Coal transportation accounted for 23% of BNI's business in 2008. Consumer products accounted for 34% of freight revenues in 2008. Industrial products made up 23% of freight revenues in 2008. This includes, building products (lumber, plywood, etc), construction products (clay, sand, cement, etc), petroleum products (liquefied petroleum gas etc), chemicals and plastics and food and beverage (canned goods, perishable food, etc). Agricultural products were 20% of freight revenues in 2008[1]. This includes wheat, corn, soybeans, and barley along with other grains. BNI's network is positioned to serve the agricultural regions of the Midwest and Great Plains. The agricultural products segment has experienced growth recently due to the tremendous interest in ethanol fuel, which is derived from corn.

Although fuel costs could be a concern for a transportation company, railroads can benefit from higher fuel prices since they are more efficient than trucking in transporting various products. This tends to shift transportation demand towards railroads with rising energy prices, thus somewhat insulating them from their own rising fuel costs. http://cdn.wikinvest.com/i/px.gif

The deal was financed with $8 billion from JPMorgan Chase and Wells Fargo. Berkshire is paying roughly 1% to 2% above the London interbank offered rate (LIBOR). The cost of funding is minimized thanks to Berkshire’s AAA-rating[2]. It is impressive that a company has retained such a high credit rating especially when other major financial institutions have a lower credit rating, especially throughout the recent economic crisis (LIBOR is based on AA rated major London banks).

Berkshire delivers very strong and consistent performance over time; excluding the derivative and investment gains, Berkshire's operating profit in the third quarter was flat at $2.06bn. The company's revenue was $29.9bn, up from $27.9bn last fiscal year.

To make such a large acquisition given the current economic situation is a testament to Berkshire’s financial strength. Given the long term value investing done by Mr. Buffet we can most likely expect a long term holding of BNI by Berkshire.



[1] BNI’s website

[2] Standard & Poor’s