Warren Buffett announces a 10.9% stake in Burlington Northern Santa Fe Corp (BNSF)

Warren Buffett's Investment vehicle - Berkshire Hathaway - disclosed in a regulatory filing that it held 10.9% stake in Burlington Northern Santa Fe Corp (BNSF), worth about $3.4 billion at current price of $88.08. Burlington Northern Santa Fe Corporation (BNSF), through its subsidiaries, is engaged primarily in the freight rail transportation business. BNSF's key business is to transport a range of products and commodities derived from manufacturing, agricultural and natural resource industries.

BNSF’s subsidiary BNSF Railway Company operates one of the largest North American rail networks, with about 32,000 route miles in 28 states and two Canadian provinces. BNSF Railway Company is among the world’s top transporters of inter-modal traffic, moves more grain than any other American railroad, carries the components of many of the products we depend on daily, and hauls enough low-sulphur coal to generate about ten percent of the electricity produced in the United States.

For 2006, BNSF achieved operating revenues of nearly $15 billion, a 15-percent increase over 2005, which includes double-digit increases in each of the Company’s four business groups. The increase in revenues and an improvement in the Company’s operating ratio enabled BNSF to reach $3.5 billion in operating income, an increase of 20 percent over 2005. As a result, BNSF achieved $5.10 earnings per diluted share for 2006 compared with $4.01 for 2005.

Conclusion:
The buy doesn’t appear to be a classic Buffett pick, as the stock of BNSF is already near its all-time high and does not appear to be a contra bet. However it does have an economic moat in the form of an infrastructure which is difficult to replicate and is much more costly that its book value (Book value of Property, Plant and Equipment in BNSF books was at $27.6 bn, which is at historical asset, current market value of which could be substantially higher). The stock is trading at a trailing twelve months earnings multiple of 17.3x earnings, which appears reasonable for a company which generates a RoE of about 19%. The book value of the stock stands at $28.11 per share, resulting in to a price-book ratio of 3.13x.