Monday, November 09, 2009

Did Buffet Get Burned on BNI?

Last week Warren Buffet announced that his company, Berkshire Hathaway (BRK) would buy the remaining 77 percent of Burlington Northern Santa Fe Corp. (BNI) that he didn’t already own for $100 per share.

Based on the stock prices of two of BNI’s competitors, Union Pacific (UNP) and CSX Railroad, BNI’s stock should be selling for $82 per share. Furthermore, based on Buffet’s bid, UNP should be selling for $76, well up from today’s closing price of $62. So either the analysts following BNI, and UNP are wrong, or Buffet has made a huge mistake. It has been advanced that Buffet is betting on the relative efficiency of railroad to trucking and/or on a U.S. economic expansion. But these explanations do not add up since, in order to consummate the purchase of BNI, Buffet agreed to sell his Union Pacific stock whose earnings are expected to grow at triple the rate of BNI over the next five years.

Given that last year, almost half of BNI’s tonnage was coal and BRK owns coal fired electricity producing Mid-American Energy, Buffet is essentially doubling down his bet that the current anti-coal, growth hostile cap & trade bill before the U.S. Senate will die a deserved death. Ernie Goss.

No comments: