MORNING MUSINGS – MARKET CHEERS THE BUFFETT BUY
Futures were looking ugly this morning, but news of a Buffett purchase of Burlington Northern and surprisingly strong retail sales has brought in some dip buyers in the early going. I have never been able to figure out why investors get so excited by Warren Buffett’s every move, but they do. Investors are buying this morning because Buffett says his BNI bet is an “all in” bet on the U.S. economy. But Buffett will be the first to tell you that he has no idea where the economy is going in 6, 12 or 48 months. He hasn’t proven to be a global macro guru as many other great hedge fund managers have. So why are his comments news? I have no clue. Granted, a $34B merger is a big deal, but Buffett has been an owner of BNI shares for years. Perhaps most important is the fact that this merger is a bit unorthodox for Buffett.
The takeout price of $100 puts the company at roughly 19.5 times 2010 earnings and looks roughly in-line with a back of the napkin DCF calculation (and I am likely being generous with future earnings estimates of well over $5.50). The takeout price is not far from BNI’s all-time high. The most interesting facet of this deal is that Buffett seems to have purchased a fully valued slow growth railroad firm. He also dilutes his own shares in the purchase – a very unusual move for Buffett. I can’t remember the last time he did a stock deal. At first glance it does not look like the usual golden touch from the Oracle.
This isn’t the first questionable move he has made in the last few years. His purchase of Goldman looks brilliant in hindsight, but was a near disaster without the government bailout. After saying he would never buy another I-bank following his Solomon Bros. debacle Buffett ignored one of his own rules. Buffett appears to have forgotten another classic rule of his – buy when others are fearful. Furthermore, his “all in” bet appears to be a very poor one. After all, a fully valued BNI isn’t exactly the equivalent of pocket aces. We’re talking more like pocket 10’s here. Is the master losing his touch? Are we seeing a prize fighter who has stuck around for a few too many fights?
In other random economic news J&J is cutting 7% of their workforce. The battle over the job market is going to reach fever pitch next year. My estimates have the unemployment rate lingering in the high 9% range for the entire first half of 2010. This news is not going to help an administration that appears to have done absolutely nothing for Main Street over the last year and while the banks can buy votes on the floor of the Congress they can’t buy votes at the polls.
Retail sales were strong this morning. ICSC data came in at 1.9% year over year and 0.1% vs. last week. The Redbook data continued its rebound with a reading of 0.9% year over year. All in all, October retail sales appear to be shaping up nicely.
In other news the EU raised its GDP forecast for the region from -0.1% to 0.7%.
The dollar is powering higher today, but the Buffett news has the bulls out in force snatching up shares on weakness. With the market selling at roughly 19 times earnings, the Buffett purchase is about in-line with the overall greedy sentiment of this market.
Buffett seems to be ascribing pretty significant value to land held on the books at cost (a la Sears). Looks like a backdoor bet on inflation.
TPC Reply:
November 3rd, 2009 at 8:22 AM
Oh God. Don’t even get me started on the monumental catastrophe Eddie Lampert is pulling off at Sears. At least Buffett isn’t planning on driving the trains as Lampert would insist on….
I agree TPC
Un-Buffett like buying–But why now?
Is Senility setting in ?
Or is this an energy play–inquiring minds want to know
Consider this:
The Rails are the cheapest form of transport for goods.
Diesel inventory at all time highs– could be betting on lower Diesel prices in the future–a key componet of Rail earnings.
BNI is a primary transporter of Coal–
Does Buffett know something about “Clean Coal” technology?
How about LNG transport–BNI home is in “Dallas/Ft-Worth” Texas.
I have to believe this is more than an ” All in Bet” on the US economy.
If you believe in the ” All in Bet” then senility has set in!
TPC Reply:
November 3rd, 2009 at 8:28 AM
It’s odd. We’re moving into a clean energy world and Buffett makes this huge bet on a coal company. I just don’t see the overall logic on this takeover.
He was also buying USG at $45-50 in late-2006/early-2007 and people were touting this as a call on a housing recovery.
Buffet’s “strategery” is almost certainly evergy related and very forward thinking IMHO. Rail beats trucking hands-down for fuel efficient shipping, with coal playing maybe a small role. But with peak-oil on the horizon (if not just over the next rise) it also may be an entre into high-speed passenger rail service being boosted now nationally. Buffet may be privy to Stimulus 2.0 now in beta, (imminent given ongoing unemployment issues) which could well put huge emphasis on homegrown rail infrastructure investment. Very, very smart—maybe better than a gold mine!
jrsun Reply:
November 3rd, 2009 at 11:01 AM
That’s right.
People short-sighted start to comment on why Buffet can’t see what they are seeing.
LOL.
TPC Reply:
November 3rd, 2009 at 11:06 AM
I think people are missing the point here. It’s not that I don’t see what Buffett is doing, but that he seems to be deviating from his traditional merger approach. This is not a typical Buffett purchase. A high valuation, stock deal, “all in” looks more like a last hurrah for the Oracle as opposed to a keen long-term investment.
kbob Reply:
November 4th, 2009 at 6:41 AM
Also let’s not forget disastrous Conoco Philips stake he purchased at the peak of the oil run up in 2008
It looks like an eco recovery plus anti-inflation move for me. which means Buffet or his advisors see US economy will eventually recover, and oil is going to rally with possible hyper inflation in the economy. Transportation is the best “simple and anti-inflation” business model in this future economic environment.
I believe warren has made a right move. In this risk environment, it is debatable which way the market is going to go, so buy value seems to be a good approach.
TPC, agree with you this is a high valuation play and is betting on a lot more uncertainty than the deals that made Buffett known to all investors. I understand that rails should rise as the economy recovers, but from a pure operational stand point BNI’s operations have to grow significantly for this to be considered a value play in any sense. Basically, they rail operations have to more than recover for this to be cheap. The energy play makes some sense, but don’t tell me Buffett would jump out of a plane with the odds of that materializing the way people seem to think. In 1975, they thought the world would be ruled by solar energy in the 2000s. There’s a lot of government regulation that can make or break the energy play. The question of coal, remains one I must research further before making any comments on. But we know this is a long-term purchase of at least 2 years or more.
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