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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 212849  
Subject: BNSF Valuation vs Union Pacific Date: 3/3/2012 10:35 AM
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Berkshire's purchase price allocation for BNSF, including previously owned shares of BNSF valued at the date of the acquisition) was $34.5 billion. Berkshire's actual cost was less since the minority position was purchased for less, but $34.5 billion was the amount put on the books for the acquisition two years ago. Book value as of 12/31/11 was $34,749 million. At the time of purchase two years ago, Berkshire's railroad operations by definition were worth exactly 1.0x book value.

BNSF earned $2,972 million in 2011 on revenues of $19,548 million. For comparison, Union Pacific earned $3,292 million on revenues of $19,557 million. Union Pacific's market cap is $53.2 billion giving it a trailing P/E of 16.2x. Union Pacific's market price is up 75% since 2/10/2010, the date of Berkshire's acquisition of BNSF.

BNSF and Union Pacific are very similar. Union Pacific has a somewhat better operating ratio. But let's just say BNSF should have a trailing P/E of 15.5. That would give it a current market value of $46 billion. That's $11.2 billion above Berkshire's carrying value. Or an implied P/B for the railroad business alone of 1.32 - a business carried at 1.0x book value two years ago.

Berkshire Hathaway's trailing p/b ratio one year ago was 1.33 vs. 1.18 today. Two years ago, trailing p/b was 1.43.

If Berkshire's "fair value P/B" is only 1.18 today versus 1.43 at the time BNSF was acquired, that must mean massive value was destroyed somewhere ... or Mr. Market might be wrong.
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