Warren Buffett’s BNI Intrinsic Value Calculation

Written by

Jae Jun

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I’ve been hearing a lot about Buffett’s purchase of BNI.

Whether the choice of a partial stock deal means that Buffett considers Berkshire shares to be overvalued, or whether Buffett is going “all in” in American stocks and commodities, or is he just making a last hurrah of asset allocation before retiring? Maybe he is simply bearish on the entire economy.

Whatever the reason, it will be easier to just wait until Buffett says something.

In the meantime, let’s take a look at whether Buffett is getting a good deal on BNI or paying a reasonable price.

Back in August as I went through each of Warren Buffett’s stock picks in the Berkshire portfolio, I posted the following on BNI.

Burlington Northern Santa Fe (BNI) Stock Value

Burlington Northern Santa Fe is a holding company and engaged primarily in the freight rail transportation business.

Firing up the stock valuation spreadsheet, I can quickly see the following.

  • Impressive FCF growth previous 4 years and especially last year
  • High capex but latest annual result was extraordinary
  • lower sales and margins but improved efficiency in returns and turnover
  • CROIC is on the low side at 3%
  • Top line growth is also above average at 14%
  • Debt to equity ratio is above 200% which isn’t uncommon for capex heavy companies

I came to the conclusion that the intrinsic value of BNI was $80-$140.

When I first calculated the intrinsic value of BNI, I chose to be conservative and reduced the latest year FCF by a significant amount as it was just too good compared to previous years. Not knowing about the details of BNI, I just left it at that and concluded that the intrinsic value had been reached at $87.

If I now go back to the stock valuation calculator and leave the FCF number as is with a default 11.6% growth rate and 9% discount rate, the stock valuation calculation shows the following:

DCF Intrinsic Value: $104.30

BNI Intrinsic Value

Benjamin Graham Value: $102.67

BNI Graham Formula

From these numbers I can conclude that

  • Buffett is either paying a small premium to the intrinsic value of $87. About 15% and not the 25-30% people are led to believe based on the closing date price of the announcement.
  • or Buffett is paying a fair price for a company that will generate future cash for Berkshire Hathaway.

Typical Old School Buffett

Whatever the reason for the purchase, one thing is clear. The purchase of BNI wasn’t a cheap one. But like his investment in See’s, it could turn out to be  one of his best ideas. He didn’t overpay by too much so the margin of safety should still be there.

Price is what you pay, value is what you get. – Buffett


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