Analysis of Berkshire Hathaway's (NYSE:BRK.A) aquisition of Burlington Northern Santa Fe Corporation (NYSE:BNI)

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Question: Why Buffet Is The Wizard of Omaha?
Answer: (NYSE:BNI)

Analysis of Berkshire Hathaway's (NYSE:BRK.A) acquisition of Burlington Northern Santa Fe Corporation (NYSE:BNI)

Value Expectations is often critical of silly corporate acquisitions, where bidders overpay to add growth or strategic opportunities.  While those terms sound nice, the bottom line is that firms need to be able to justify the value of said growth or strategic opportunities with future cash flows.  More often than not, firms bank on unreasonable growth or profit expectations to justify a deal.  For recent examples, see our analysis of Kraft/Cadbury or Dell/Perot:

Using our Value Expectations™ process, we can understand why Buffet has put together such a consistent long-term track record making investments.  The table below summarizes BNI’s achieved sales growth and EBITDA margins, and the implied expectations Buffet is paying for in the $100 share price.

Source: www.ValueExpectations.com

While we do not have a 50 year track record like Mr. Buffet, we employ many of the same concepts Mr. Buffet has employed throughout his career, namely:

We quantify those factors through the use of our – Management Quality Scores, Intrinsic Value Analysis (Value Scores), and expected changes in economic profitability levels (Economic Margins). The graph below displays the results of applying our process to US stocks since 1989.

AFG Recommendation Performance
9/1998 – 5/2009
Annualized Returns

Source: AFGView client databases from 9/1998 – 5/2009
Universe size: 4,000 to 5,500 firms

Interestingly, the Toreador Large Cap Fund (TORLX), which also follows many of the above principles, agrees with Buffet as BNI is its largest holding in the transportation sector.

For a list of stocks meeting the VE criteria above, check back during the week as we put one together to salute the Wizard for leading by example again on how to make a smart acquisition.