Shockingly, investors are actually bidding up shares of Berkshire Hathaway (BRK) following the news that it’s spending $44 billion to buy Burlington Northern (BNI). We’re not suggesting it’s a bad deal, only that when you’re paying out such a monster counterparty, you’re usually going to get a selloff not this time.
That being said, some folks aren’t so impressed with the deal.
Reuters’ Rolfe Winkler runs some quick numbers:
So I thought I’d do a little number crunching on Buffett’s Burlington deal. What does that tell us? That Buffett is paying a full price for a business with mediocre returns on capital, that he’s betting on growth, not value.
Valuation (based on share prices of $100 for Burlington, $59 for Union Pacific, and $48 for Norfolk Southern):
- Enterprise Value to 2010 unlevered free cash flow (think of this as a better alternative to P/E ratios): BNI = 29x UNP = 24x NSC = 18x
- BNI = 29x
- UNP = 24x
- NSC = 18x
- Return on capital employed (based on 2010 operating income and year-end ’10 balance sheet estimates. BNI = 11% UNP = 10% NSC = 10%
- BNI = 11%
- UNP = 10%
- NSC = 10%
(I’m using Stifel Nicolaus estimates for 2010)
The cash flow characteristics of the business aren’t very good. From 1999 to 2009, BNI poured 68% of operating cash flow back into capital expenditures. That’s cash flow that doesn’t go to shareholders.
That corroborates what we said earlier: That Buffett’s bet is on future stimulus, not merely on the railroad spinning of a ton of cash in its current form. Suddenly, we’re guessing, a lot of Berkshire shareholders just got really, really liberal.