Investment Jungle

Having already looked at one of Warren Buffett’s holdings (USG Corp), I thought I would have a look at one of his recent purchases - Burlington Northern Santa Fe Corporation which trades on the NYSE under the symbol BNI. Has the Oracle of Omaha found us a Rule #1 stock? Let’s have a look.

Company Profile:

From Yahoo Finance

Burlington Northern Santa Fe Corporation, through its subsidiaries, provides freight rail transportation services in North America. The company transports various products and commodities, including consumer, industrial, coal, and agricultural products.

Market capitalization is $28.56B.

Fundamental Analysis:

Do the Big Five show a moat for this company?

Well, right off the bat, the return on invested capital does not meet our Rule #1 minimum of 10% per year for the last 10 years. In fact, it only surpassed this milestone once in that period and that was just last year!

Return on equity has been incredibly steady. The 10 year average ROE and the 5 year average ROE are both 12.76%! It has been increasing over the last couple of years to 16.14% and 17.42% respectively.

The equity growth rates have remained incredibly stable as well. The 9 year rate is 7.2%. The 5 year rate is 7.21%. The 3 year rate has a slight increase at 7.82%. Last year’s equity growth rate breaks the trend by increasing to 13.52%. However, the 10% minimum required growth is not being met here.

Now, earnings per share growth rates have exploded over the last 3 years with rates of 37%, 44% and 22% respectively. However, most of the years before that were quite pathetic with rates of 2.97%, 0.82%, -15% and -3.85%.

Finally, a good looking trend shows up in the sales growth rates. The 9 year rate is 5.46%. The 5 year rate increases to 11.18%. The 3 year rate increases further to 16.95%. and last year’s rate remains steady at 15.38%.

Cash flow growth rates have been equally as good with the 9 year rate at 7.83% increasing to 14.49% over the last 5 years. The 3 year rate is fantastic at 23.22%. But last year’s rate slips down to 17.5%.

The Big Five do not meet our Rule #1 criteria in our 3 most important metrics.

Stock Analysis:

The question is: Did Warren overpay for BNI? Let’s calculate the sticker price.

For the future P/E, I will be using the 10 year average P/E of 13.43. It is more conservative than the 5 year P/E of 13.98 or the current P/E of 15.81.

For my initial estimate for future EPS growth rate, I chose 7.2% which is derived from the 9 year equity growth rate. In fact, it is also the 5 year equity growth rate as well. Analysts have forecast twice that for a future EPS growth rate of 14.4%. But I will stick with my more conservative estimate.

With this information, the sticker price works out to $ 33.61. At the current price of $79.83, it looks as though Warren paid a premium of 137%!

Check my BNI calculations here.

Here is the 1 year stock price chart:

Conclusion:

It seems that Rule #1 investors definitely use a different approach to valuing a company. From a Rule #1 investor perspective, this stock would definitely not be classified as a Rule #1 stock. Now, that is largely due to the fact that this stock has not performed over the entire 10 year period. It has definitely been coming on strong over the last 3 years.

What are your thoughts?

Full Disclosure: I do not own shares in BNI.

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