I am still intrigued by Buffett’s all in purchase, because it would imply that BNI is the perfect stock in his 70 years of investing. This is the man that waits for fat pitches, hence this must be the mother of all fat pitches.
Here are the 4 criteria that Buffett tries to satisfy before he invests.
1. Do I understand the business.
2. Does the firm have a sustainable business with a strong competitive advantage.
3. Do I trust the management.
4. Is the valuation of the company such that I have a margin of safety.
BNI must have satisfied all the above beyond any reasonable doubt for him to go all in. On the fourth point about a reasonable margin of safety, why pay substantially above market value mystifies me, though that is frequently a necessary premium when taking full control of a firm. Buffett does frequently say that he would rather pay a reasonable price for a great business rather than a great price for a bad business, so this is what a great business looks like and he does not mind overpaying for it. It would appear that he is being true to his beliefs. However, if you do not understand him, then go back to the old standby, “ life is a mystery, just accept it”.
In my view he is very right on the first 3 criteria, though the valuation issue is more subjective. He must have a much deeper understanding of the growth rate of that business and the profitability that lies ahead and so feels comfortable paying up for it.
Republicans won two governorships against democrats in yesterday’s election, which may indicate a push back on Obama’s policies. It appears a clear shot across the bow, now let us see if the democratic leadership responds in self preservation and moves toward the political and economic center. Business is the business of America, if that gets undermined at the expense of anything else, politician beware. Even same sex marriage got rejected in Maine, which is not even an economic issue, may indicate that the American public is in conservative state of mind that spills over to social issues. For stocks, the rejection of collectivism is bullish as that is the antithesis of capitalism.
On a different topic, the railroad business appears quite simple to understand as a business, and moreover it appears very sustainable. It is very unlikely to be displaced by new technology, or lower competing transport costs. There are no competing rail tracks being built parallel to existing ones, hence they have pricing power. Rail transport costs are dramatically cheaper than trucking transport costs, and substantially less polluting, hence they even have a positive green impact. The simplicity and sustainability and competitive position of the railroad business meets the “sure thing” criterion for a Buffett investment, and this time he went “all in”. At this point in his life, he is in an “all in” type of guy, and that makes a lot of sense. An equivalent railroad to Buffett’s BNSF, is Union Pacific with similar ROI and P/E and sales growth numbers.
Joseph Dirnfeld
Audax Investments
audaxinvestments.wordpress.com/
917 838 3093
305 861 8670
Company total sales 5yr sales growth Ave ROI 5yrs Dividend Valuation( P/E)
PBR $98 billion 30.88% 17% .82% 13.7
STO $95 billion 21.34% 14.3% 2.93% 35
OXY $18 billion 21.2% 18.7% 1.74% 16.4
XOM $ 305 billion 14.11% 23.2% 2.34% 16.8
BP $233 billion 16.85 15% 5.93% 20.1
TOT $191 billion 13.38% 13.6% 5.38% 13.6
CVX $ 168 billion 17.63% 19.7% 3.55% 12.5
COP $154 billion 18.56% 18.56% 3.99% ?
E $140 billion 15.7% 15.6% 5.91% 12.7
PTR $131.8 billion 28.11% 21.1% 3.03% 14.7
ECA $25.4 billion 28.68% 12.2% 2.87% 7.2
Here above is a list of the major and most successful oil companies in the world. PTR , ECA and PBR have had the greatest 5 year sales growth. PBR has found major oil reserves of the coast of Brazil, assuring itself sustainability and growth in the years ahead, though they will come at great developmental cost and risk. I have excluded Gazprom as it focuses primarily in Natural gas and Royal Dutch as it has a return on capital of only 6%.
If we rank the above by the ratio of ( ROI to P/E ) a surrogate measure for best value, we get to rank them by most profit per unit of value . Moreover, if we assume the past performance holds, then the three best ranking are ECA, Chevron, and PTR.
Past performance in difficult to assume given the different proven crude oil reserves positions they hold individually, and that impacts their future performance and valuation . PBR has probably the best future reserves as they develop the large oil fields off the cost of Brazil, though at huge expense and far into the future before any production materializes. ECA with a P/E of 7 looks underpriced, though they have more exposure to natural gas, which is depressed at present, and PTR is a quasi governmental company, hence applying this analysis , CVX is probably the least risky.
Joseph Dirnfeld
Audax Investments
audaxinvestments.wordpress.com/
917 838 3093
305 861 8670
