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.

Warren Buffet 2006 Common Stocks Portfolio Analysis

1. The real growth in the value of common stocks (excluding purchases and sales during the year) was 17%.
2. Growth in market value of new scripts purchased during 2006 was at 35%
3. The market value of the total common stock portfolio increased to US $61.5 bn, an increase of 32% over previous year, while the cost increased by 44% to US $23 bn.
4. Allocation to stocks present as on Dec’05 increased 5.3% (cost of those stocks increased from $10.8 bn to $11.4 bn. The market value of such stocks (including fresh purchases increased by 18.7% to $45.4 bn. These ‘old’ stocks formed about 74% of the total market value of the portfolio.
5. The largest old position in terms of portfolio weight was The Coca Cola Company, followed by American Express Company.
6. Among the stocks finding their entry in to the portfolio in Calendar year 2006, the highest gain was recorded by POSCO at 102%, and the lowest by Johnson & Johnson at 13%.
   

Latest ddition to stocks in Buffett's (Berkshire) Portfolio in 2006:

Figures in $ mn
No.	Name	Cost	Mkt Value	% weight	% chg
1	Conoco Phillips .	1066	1,291	17%	21%
2	Johnson & Johnson	1250	1,409	18%	13%
3	POSCO	572	1,158	15%	102%
4	Tesco .	1340	1,820	24%	36%
5	US Bancorp .	969	1,123	15%	16%
6	USG Corp	536	936	12%	75%
	Total 'New' Common Stocks	5733	7737	100%	35%

Warren Buffett Letter to Shareholders 2006 - Highlights

1. Geico has continued to improve its profit margins by increasing its productivity by 47% over a 3 year period. At the same time the company has increased its advertising expenses substantially from $238 mn in 2003 to $631 mn in 2006.

2. Buffett measures the growth in intrinsic value of Berkshire by two yardsticks:
o The first is the amount of investments (including cash and cash-equivalents) that Berkshire owns on a per-share basis and
o The second yardstick is the pre-tax earnings from non-insurance businesses.

3. Berkshire has concluded 2 key acquisitions in 2006:
o ISCAR – a manufacturer of small, consumable cutting tools that are used in conjunction with large and expensive machine tools, and
o TTI – a distributor of electronic components.

4. One of the key highlights was the explanation of the economics of the media industry in general and newspapers in particular. Key points are:
o The fundamentals are definitely eroding for the US Newspaper industry in favor of the cable & satellite broadcasting and the internet. This has caused the profitability of Berkshire’s newspaper operating business, viz, Buffalo News to fall.
o The profitability of the media (newspaper, of news channel, or the internet website) business is dependent on its relative reach. If the relative reach is high, the media can charge a higher charge for advertisements, which can be raised annually to keep increasing the profitability.
o One of the best business to own is a media business with a very high relative market share, which is like a uncontrolled monopoly with a huge pricing power.

5. Buffett expects his key investee companies to grow their earnings by 6% to 8% annually, a rate that would double their earnings every ten years or so.

6. Berkshire has, since 2002, made a profit of $2.2 billion from its bet on depreciation of US dollar.

7. According to Buffett, the slide in dollar is imminent due to the rise in US trade deficit, which has increased to an alarming 6% of GDP. This 6% of GDP is financed by capital account (foreigners buying into US dollar denominated assets). However, one of the most alarming trend is the investment income of US turning negative for the first time since 1915. According to Buffett, the US shall henceforth experience “reverse compounding”, i.e., pay net interest to foreigners on their investments in the USA.

8. Buffett has put out a disguised advertisement for a young fund manager who he wants to appoint to manage the portfolio of Berkshire. The key characteristics of the desired candidate are:
o He should have an impressive investment record
o He should be genetically programmed to recognize and avoid serious risks, including those never before encountered
o He should have independent thinking, emotional stability, and a keen understanding of both human and institutional behavior
o He should remain with Berkshire and not be lured away by money (having Berkshire on a resume would materially enhance the marketability of an investment manager)

9. Buffett has once again stressed the need for compensation to be tied to the operating performance of the manger and nothing else (like competitive payscales)

10. Buffett ridiculed market efficiency by giving the example of Walter Shloss, who has consistently beaten the markets by buying “Cheap Stocks”.

Warren E Buffett – A Profile

Warren Edward Buffett is an American investor, businessman and philanthropist and is the largest shareholder and CEO of his investment vehicle, Berkshire Hathaway. He is ranked by Forbes as the second-richest person in the world, behind the Microsoft co-founder Bill Gates.
As on February 2007, the value of his stake in Berkshire Hathaway was valued upwards of $50 bn.
In June 2006, he made a commitment to give away his fortune to charity, with 85% of it going to the Bill and Melinda Gates Foundation.
Investment Philosophy:
Buffett’s investment philosophy had the following key tenants:
· Invest in companies with a large economic moat (high degree of competitive advantage) which is reflected in its ability to raise prices of its products over a period of time.
· Invest with in your circle of competence (invest in companies and businesses you understand)
· Invest only for the long term. Buffet immortalized long-term investing by following quote – “my favorite holding period is forever”.
· Invest in businesses with a consistent and high absolute return on capital employed, which should be reflected in a market price to book value of greater than one (a company should generate more than $1 for every dollar invested in business)
· Invest a price which provides a very high margin of safety (purchase your investment a huge discount to its intrinsic value)
· Intrinsic value of a business is equal to the present value of all the future cash that can be taken out of that business
· Focus on Owner Earnings (free cash flow) in valuing a business.