Berkshire Continues To Increase Stake in BNI

[Guest JackRiver]

Too expensive is a general and generic answer to the question and I'm not even sure if it is applicable to the point of the quote.

 

Yours

 

Jack River

 

 

 

[Guest JackRiver]

prevalou

 

What I mean to say is I don't think the debate is about price.  That's a different topic all together.

 

Yours

 

Jack River

 

 

 

[prevalou]

could you explain the two important differences between UNP and BNI ?

[Guest JackRiver]

No  :)

 

Nice try. 

 

Yours

 

Jack River

[prevalou]

"Unlike the competition, BNIs maintenance cap ex is fully up to date (if not more)"

I don't buy this argument. Except for the freight cars wich represent a small amount of properties (4%-5%)

[ExpectedValue]

So here I am looking at this quote, "what could kill this idea" and I'm thinking it sounds nifty and new but does it actually provide any added value to that which has already been said and is well understood.  Does it deserve attribution?  If it is different than a mere "I think about the risk" then does it provide useful insight, and can someone provide an example of it (doesn't have to be with regards to BNI)?

 

 

I really think you're freaking out over the rhetoric involved in using the word "kill" rather than risk. Here is a quote from Berkowitz about "killing ideas"

 

Q: Do you try to anticipate which sectors will do best?

 

A: We tend to react rather than to predict. We look at companies, count the cash, and then try to kill the company.

 

Q: Kill?

 

A: We spend a lot of time thinking about what could go wrong with a company — whether it’s a recession, stagflation, zooming interest rates or a dirty bomb going off. We try every which way to kill our best ideas. If we can’t kill it, maybe we’re on to something. If you go with companies that are prepared for difficult times, especially if they’re linked to managers who are engineered for difficult times, then you almost want those times because they plant the seeds of greatness.

 

Its simply a manner of looking at risk factors and how they can affect the company's value, dirty bomb (terrorism) and recession, stagflation, zooming interest rates (economic conditions) are both possible risk factors named in the company's 10-K.

 

[prevalou]

the management of BNI (and UNP) is well paid, too.10.5 m$ for BNI in 2007: not bad for a business whose principal decision is :"how much do i increase the fares this year."

[Guest JackRiver]

TariqAli

 

I don't know who Berkowitz is but reading that Kiplinger Q and A you provide I better understand what Berkowitz is trying to say, which isn't anything new, but, instead, an emphasis of stress testing a company against a general set of macro economic environments or possibilities.  I agree now, this is useful.

 

He says, "We spend a lot of time thinking about what could go wrong with a company — whether it’s a recession, stagflation, zooming interest rates or a dirty bomb going off. We try every which way to kill our best ideas. If we can’t kill it, maybe we’re on to something. If you go with companies that are prepared for difficult times, especially if they’re linked to managers who are engineered for difficult times, then you almost want those times because they plant the seeds of greatness."

 

It's akin to Buffett when he speaks of the "economics of the business."  Would you agree?

 

Yours

 

Jack River

 

 

 

[prevalou]

I noticed UNP has a lot more land than BNI (4,5 billions $ versus 1,7 billions$) on its book.

Does someone know why there is such a difference between the two twin railroads?

[TerryO]

Upcoming taxes on carbon dioxide emissions are going to make energy more expensive. In this light, a plus for the railroads is that rail transport is much more energy efficient than truck transport. After the imposition of the taxes, a railroad that had pricing power could move much of the energy savings to the bottom line.

[Mungerish]

And then of course there is the zeal for regulation and goverment interference. From Todays WSJ:

 

A federal agency handed down a $345 million penalty Tuesday against Burlington Northern Santa Fe Corp., ruling it overcharged two Western power companies by tens of millions of dollars since 2004.

 

The record penalty is the latest chapter in a growing dispute over whether the nation's biggest railroads have too much power to raise prices on their customers, some of whom have few or no alternatives for shipping their goods.

 

In a 3-0 decision, the federal Surface Transportation Board ruled that the Fort Worth, Texas, company -- the largest railroad in the country by revenue -- charged unlawfully high rates to Western Fuels Association Inc. and Basin Electric Power Cooperative Inc., which provide electricity to residents in nine Western and Midwestern states.

 

The agency concluded that the utilities were "captive shippers," meaning they had only one choice of railroad to ship eight million tons of coal each year from the mines in Wyoming's Powder River Basin. The utilities also couldn't ship the coal by any other mode of transportation, the Surface Transportation Board concluded.

 

Burlington Northern called the ruling "an outcome-oriented decision in favor of the shipper," adding that it intends to "pursue all legal remedies."

 

Surface Transportation Board officials say the penalty is the largest handed down since the agency was created in 1996. Under the ruling, Burlington Northern must reimburse the utilities $100 million for overcharges since 2004, when the companies filed their complaint. The remaining $245 million represents the difference between what the railroad will be allowed to charge the utilities for the next 15 years and what it would have earned absent the decision.

 

The ruling comes as legislation pending in Congress would make it easier for some customers to challenge railroad rates and subject the industry to stiffer antitrust scrutiny.

 

The railroads' critics have been especially vocal in recent months as railroads have earned healthy profits even as freight volumes have fallen dramatically with the global slowdown.

 

Write to Alex Roth at alex.roth@wsj.com

 

 

[JAllen]

It really is genius the more I think about it.  Coal can't be put into 18-wheelers- ever.  Maybe the earnings growth forecasts for this company are underestimated.  Although, profits might be limited by rulings of this nature. 

 

Can they regulate any freight rates or is it just for utilities?  Is BNI his choice because they have the most track in areas where they are the only one?

 

It truly is a modern day toll-bridge, and I think Charlie is right when he says that Buffett is getting better as he ages!

[prevalou]

Another problem with railroads.

If Buffett is right about future inflation (see his recent shareholders letter), businesses with large investments will be the most impacted.

So why not invest in lighter businesses with higher ROA ?

[prevalou]

I noticed BNI ahas a strong intermodal franchise. For instance, it carries nearly 80% of total asia pacific imports.

It was a big advantage when the US consummed all what China produced.

But we are  maybe in a different world now, structurally more thrifty. So has BNI competitive advantage eroded?

 

[pohick]

i kinda like "what kills this", an inversion of widening the moat

 

BNI has a large investment, sunk cost, like a toll bridge,

pricing power for inflation

 

tied to economic cycle, west coast to mississippi trade, recession hurts revenue

 

also push back on powder river coal trade, with crash in coal price

 

historically, railroads went bankrupt in recessions, because they were levered for the good times

right now is the worst case, playing out

on a recovery they will boom

[Guest ericopoly]

Another problem with railroads.

If Buffett is right about future inflation (see his recent shareholders letter), businesses with large investments will be the most impacted.

So why not invest in lighter businesses with higher ROA ?

 

 

There shouldn't be a problem unless they are unable to raise prices.  What am I not taking into account?

 

[prevalou]

Suppose BNI has 2 $billions net income for 30 billions properties.

In an inflationnary world, BNI will maintien or slightly increase its net income. But, the properties replacement cost will jump.

So, if inflation is 10%, replacement cost will jump 3 mrd$ a year versus net income will rise maybe 200 $millions.

[Guest ericopoly]

Suppose BNI has 2 $billions net income for 30 billions properties.

In an inflationnary world, BNI will maintien or slightly increase its net income. But, the properties replacement cost will jump.

So, if inflation is 10%, replacement cost will jump 3 mrd$ a year versus net income will rise maybe 200 $millions.

 

Two questions:

#1 Under what circumstances would they need to replace all of their property?  Property improvements I can see needing replacement as buildings fall down, and trains/cars wear out.  But the land?  Although I think much of the "fall down" is already accounted for in net income via maintenance expense and depreciation.

 

#2  Why does it matter if you earn 2b on 3b, or 2.2b on 33b?  Aren't you getting the same return on your assets?

 

 

[prevalou]

this is the problem: the return on assets is the same (best case) in an inflationary world.

So you have a fixed coupon of 10% with a 10% inflation.

 

If you consider Coca Cola. Light business, the company can raise its price on the concentrate and increase its return on assets (no properties to replace)

[Guest ericopoly]

this is the problem: the return on assets is the same (best case) in an inflationary world.

So you have a fixed coupon of 10% with a 10% inflation.

 

If you consider Coca Cola. Light business, the company can raise its price on the concentrate and increase its return on assets (no properties to replace)

 

 

Maybe focusing on assets is a mistake.  Coca Cola has to pay more for the ingredients, distribution, & marketing -- the spread between the ingredients cost and the price on the finished product should be the same.

 

This is the same for BNI

 

I still don't see any problem.  And again, they don't ever need to replace their land -- doesn't much matter whether this is a $1b item or a $30 Billion dollar item -- the intrinsic value of BNI is in the income produced, not the replacement cost of the asset.

 

The business to worry about with inflation is one that cannot raise prices and yet has no negotiating power with labor/suppliers.

[Guest ericopoly]

The other thing that comes to mind is that Coca Cola sells at 5x book value.  This would be clearer if you were to acquire the entire company -- you'd have a huge goodwill asset on your balance sheet.

 

Now, as long as Coca Cola's brand is as permanent as BNI's land this isn't a problem.

 

However, you seem more concerned about BNI's land value than Coca Cola's intangible value.

 

Now, Coca Cola looks like it will be here forever, but I think BNI's land value is probably the more permanent of the two.

[prevalou]

ok, let's take an asset point of view. When you buy a business you buy a pice of assets.

 

For Coca Cola, you buy an intangible asset, that will not depreciate in real terms, in an inflationary world.

For BNI, you buy two assets:

1) land that will not depreciate in real terms (like Coca Cola intangibles)

2) properties (railcars, etc.), that will seriously depreciate in real terms.

the sum of 1) and 2) will give depreciation in real terms.

 

Maybe, you can suppose land will appreciate in real terms, why not. In this case, how much to match the depreciation on the other properties? What is the value of land versus railcars, etc.

 

[Guest ericopoly]

 

For Coca Cola, you buy an intangible asset, that will not depreciate in real terms, in an inflationary world.

 

 

 

Cut your marketing expenditures to zero and observe your depreciating intangible asset.

 

It may appear like it doesn't depreciate, but that's during a history where Coke has polished it daily with an ongoing marketing campaign.

 

BNI doesn't spend on polishing it's brand, but it spends on railcars.

[prevalou]

a great reading on this subject is "the intelligent investor" from Benjamin Graham (chapter 2 the investor and inflation)

 

Studying the 1950/1970 period, he found that with inflation, earnings on capital actually decreased (instead of increasing). Culprits: 1) a rise in wage rates exceeding the rate of productivity, and 2) the need for huge amounts of new capital, thus holding down the ratio of sales to capital employed.

 

In an inflationary context, BNI would be sensitive to these two points, Coca Cola certainly a lot less.

[prevalou]

and last try:

BNI Roa is about 13%

KO Roa is about 100%

 

when there is inflation, businesses are reactive and there is generally a lag between the increases in expenses and the repercussion on prices.

So, it is better to have a margin of safety. With a 100% ROA, the margin of safety is from my point of view better than with a 13% ROA.