Buffet Buys Burlington Northern Outright (NYSE: BNI)

Visit the front pages of Wall Street Greek to see our current coverage of economic reports and financial markets.

(Tickers: BNI, UNP, CSX, JBHT, CNW, LSTR, BRK.A, BRK.B, DIA, SPY, QQQQ, NYX, DOG, SDS, QLD, XLF, IWM, TWM, IWD, SDK)

Anchor Chains, Plane Motors & Train Whistles

Remember a few weeks back when Burlington Northern (NYSE: BNI) and Union Pacific (NYSE: UNP) sank the transports and the Dow on warnings that the economy was not steaming ahead after all? BNI's stock derailed that day, but Warren Buffet, who owned a major stake in the company, demonstrated why he is the world's greatest investor of all-time. While the world was selling BNI like it was the plague, America's Grandpa was putting together a plan to buy the rest of the company's outstanding shares.

Buffet Buys Burlington Northern Outright

Remember that old adage, "Buy into fear and sell into greed?" As well-known as it is, it remains mostly misunderstood. It seems it goes against human nature to walk toward danger, but the answer to the riddle is found deeper within that philosophy. It is precisely because what seems dangerous is not always really so bad that opportunity exists. Our savings, however, is so important to our security-centric mindset that we cannot bear the risk of losing, and so we lose out.

Buffet's big trick is that he thinks differently. He considers first the long-term you see, and until they invent the Star Trek transporter, there will be a need for traditional transportation methods. Buffet, acknowledging this, thought here's a wonderful opportunity to take a greater stake in a key transportation company that supplies a fantastic economy.

Berkshire Hathaway Inc. (NYSE: BRK-A, BRK-B), Buffet's investment vehicle and conglomerate, agreed to acquire Burlington Northern Sante Fe (NYSE: BNI) today. Berkshire is acquiring the 77.4% of the company it did not already own. The deal, valued at $44 billion when including the $10 billion in debt obligations that Berkshire will take on, prices Burlington Northern at $100 a share. The acquisition price represents a 31.5% premium to the prior day closing price of $76.07. That's a nice short-term windfall for BNI investors. And isn't it just so Buffet like to set the acquisition price at $100 even!?! Buffet called the deal "an all-in wager on the economic future of the United States." You gotta love this guy...

Buy Railroads, Sell Truckers

Buffet likes railroads for the long-term because of what's going on in energy. As demand for oil and its distillates likely fires in the years ahead, truckers like J.B. Hunt (Nasdaq: JBHT), Landstar System (Nasdaq: LSTR) and Con-way (NYSE: CNW) face an economic impact four times more expensive than the railroads, according to Buffet. If this is truly the case, you could expect market share gains to ensue for the railroads, and at the expense of the truckers. Market share gains are often drivers of P/E expansion as well, and they certainly are drivers of earnings growth. Therefore, railroads should produce better than recent earnings growth and share price appreciation. Add to that the whammy of prospective economic recovery, and you have something worth owning. As a result, you might find strategic investors and profiteers alike seeking to buy railroads now. Thus, the shares of all the segment's stocks should rise.

This deal places the P/E of Burlington Northern at 18.2X BNI's estimated 2010 earnings of $5.51. Union Pacific's (NYSE: UNP) relative P/E ratio is 13.1, according to Yahoo Finance and its data providers. CSX (NYSE: CSX), another major rail player, sees a P/E of 13.1 as well. BNI's P/E was 13.8 before this deal was effected, and the slight premium probably had a lot to do with Buffet's growing interest, in every respect of the phrase.

While we do not offer investment advice here, another investment idea might be to play the market share trend by buying the railroads and selling the truckers, though economic recovery benefits all players, including the truckers. However, you negate that factor by evenly matching the two sides of the deal, or you might overweight the rails if you believe in the economic driver.

Now keep in mind that Buffet's reasoning ignores the possibility of changes in technology. While expecting the transporter beam to become reality any time soon might be far-fetched, it is possible truckers might find another way to fuel the big rigs and regain competitiveness. However, that does not seem to be soon coming either. The power train of a big truck seems a big stretch to be run by electric, natural gas, hydrogen fuel cells or any other prospective technology anytime soon. However, if that does become reality, you can sure bet Buffet will be buying truckers, or whichever segment adopts new cost effective technology.

In Conclusion - A Warm Note

If he ever took a moment from his wonderful investment life, we are certain Mr. Buffet liked to own the railroads in the board game Monopoly. He's just that kind of a down to earth fellow. When a Greek/American kid I know who likes to write and analyze stocks finished business school, he wrote to Mr. Buffet and offered to work for free in his Nebraska office. The kid figured he would deliver pizza to pay his bills, which should not be that high in Omaha. Meanwhile, he wondered at the prospect of learning from a genius of security analysis and a legend of the times. The reason "The Greek" has earnest affection to this day for Mr. Buffet, who he has never met, is not because the legend accepted the dreamer's offer. Nope, he probably gets too many of them to accept even one. However, Mr. Buffet actually took a moment to return the boy's letter with one of his own. I keep that letter to this day inside the pages of a book I have on the man. Thanks Warren.

We here happen to love the statement by George Bailey in "It's a Wonderful Life," "Hey, do you know what the greatest sounds in the world are? anchor chains, plane motors and train whistles." That dreamer also never got to go to the places he dreamed he would, and yet he lived a wonderful life anyway.


Please see our disclosures at the Wall Street Greek website and author bio pages found there.