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Burlington Northern's Tepid Outlook Is A Warning


Parsad
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Even with deeper recession, the yield from bnsf is better than the interest being paid or the interest on cash through treasury bonds - ala Bill Gross. The downside is the berkshire shares being doled out which clearly are undervalued. I think BNI is will likely work out ok in two-three years time. Already the freight traffic in December is trending up compared to 2008 December, if the trend lasts, it should be ok.

 

I think the trend with takeovers is becoming clear, Geico and Gen Re took several years to fix as is the case with SNS which is a Biglari play. Except in the case of family run businesses which sell for liquidity, I don't think one can expect to get a good deal from acquiring publicly traded companies right off the bat.

 

 

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Why BRK is undervalued, from the same report:

 

Averages for the past ten years:

 

Current price to book value

    1.3x

Minimum price to book value

    1.0x

Maximum price to book value

    2.0x

Median price to book value

    1.6x

 

However, the price paid for BNI is not exorbitant, if free cash flow levels remain at 2009 levels. Berkshire should get a better deal on interest rates which should atleast 100 million in free cash flow. This means that the price of good will ( after subtracting the increased book value ) vs free cash flow is around 12. This isn't great in the short term but longer term if the inflation picks up and cash flow gets better, things should turn out ok.

 

 

 

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  • 2 weeks later...
Guest Bronco

I personally don't think the railroad business is a great business, but this will work out OK for Berkshire.  Just another toll booth for them to play with.

 

It may be cheaper to ship via rail (as opposed to truck) when looking at fuel costs, but it would seem to me that the cap-ex for railcars and for train tracks is higher than trucking.  No science or analsyis here, just random thoughts.

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I personally don't think the railroad business is a great business, but this will work out OK for Berkshire.  Just another toll booth for them to play with.

 

It may be cheaper to ship via rail (as opposed to truck) when looking at fuel costs, but it would seem to me that the cap-ex for railcars and for train tracks is higher than trucking.  No science or analsyis here, just random thoughts.

 

Well utilities and railroads are totally different animals, they won't get you 20% returns but they will generate cash until then end of time if it is well managed. I see it as a long term hedge against inflation with cash generating capabilities, contrary to gold.

 

BeerBaron

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It may be cheaper to ship via rail (as opposed to truck) when looking at fuel costs, but it would seem to me that the cap-ex for railcars and for train tracks is higher than trucking.  No science or analsyis here, just random thoughts.

 

At $20/barrel oil -- shipping advantages indeed favour the trucking industry.  Move up to about $50-$60 though and it would seem to start favouring rail.  At around $80/barrel (currently) we are just scratching the surface of the rail shipping advantage.  As fuel costs rise --- so too does the rail shipping advantage.  But there is more advantage coming in some form of Carbon Tariffs.  Not only do you pay for your fuel -- but you also pay to burn it.  It's not a matter of 'if', rather 'when' carbon tariffs become reality.  

 

As this all takes place - rails in general should benefit from the return of some domestic manufacturing where some overseas imports have an increasingly difficult time competing.  But BNI has another strong wind in it's sails: of all the large rails, it is would seem to have the best strategic advantage with regards to Mexican import traffic (BNI would also arguably have an acquisitive advantage to stengthen their competitive edge in relation to this).  As energy costs rise and carbon tariffs kick in, Mexico will have an increasing advantage over China in terms of cheap labour manufacturing for certain products.  

 

A very good book on the subject below.  While what happens could be more gradual/long term than is often suggested in this book -- it does open one's mind to the energy situation we face in a growing global economy and the sort of changes to expect.  Some of the moves we have seen BRK make the last little while (particularly the BNI acquisition) ... it leads one to think that WEB is thinking of forces at play along these lines.  The book is called: 'Why Your World is about to get a Whoe lot Smaller' by Jeff Rubin.  A very good read:  

http://www.kobobooks.com/ebook/Why-Your-World-Is-About/book-o6NpiolfFESaTS2DsQsRGw/page1.html

 

UCP / DD

 

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