GURUFOCUS: The private market value of Burlington Northern Santa Fe

Oct. 04, 2009 | Filed Under: BNI

There have been several questions as to the private market value of BNI. While it is difficult to put a number on this, Warren Buffett, when buying a business, always ask what is it worth and suggests looking at recent transactions in the industry to get a better understanding.

As mentioned, the industry has consolidated to just seven players so a reasonable effort to value the railroad would be to look at what these players are doing: The Dakota Minnesota & Eastern Railroad Corp. (D,M&E), a division of Canadian Pacific, recently put its $6 billion plan to ship coal in Powder River on hold. DM&E cited weakness in the economy as well as other regulatory concerns.

This is a 278 mile project with a $6 billion price tag, suggesting that each mile is worth over $21 million. Additionally, D,M&E received a $2.5 billion grant from the Federal Government. While it is unknown whether D,M&E will be successful in efforts to build the railroad, these metrics are quite telling as BNI is currently valued at over $1 million a mile, thus highlighting the margin of safety that is so important when making an investment.

With the stock trading around 80, the company is trading at approximately 14x 2010 earnings and 7x 2010 EBITDA. It should generate over $1.2 billion after capital expenditures and will pay out over $500 million in dividends. As mentioned above, the company has generated a healthy 7% cash flow yield for the last decade and used that cash flow in a wise manner – the shares have decreased by over 160 million. As there is weakness in the economy, the company has suspended its share repurchase plan but those who have been following Buffett know that he has made the bulk of his purchase around these prices.