Say we wanted to get an updated value of various Berkshire subs – or get an idea of a public-equivalent
pricing for a prospective private-company acquisition - we can use market data we have at hand to get us in the ballpark. Again, we’re only talking current market comparisons here – we’ll always want to take a few perspectives on our assessments of any business – but if current market comparisons are what we’re after, we might take this sort of approach.
There is a tendency among analysts to look at valuations in terms of EV/EBITDA. I’d agree that EV is a good starting point (more instructive than jumping straight to market cap), but as for EBITDA – I’d instead defer to Buffett, who’ll we’ll recall has criticized analysts who would try to pitch company valuations built off of the EBITDA level. It's often presented as a handy proximity for cash flow, especially in pitches to prospective acquirers. It's natural crutch for sellers.
Buffett's assertion has been that depreciation is a real businesses expense – the P&L manifestation of real and necessary capital expenditures – and we should be including that ‘Depreciation and Amortization’ in the earnings we’re considering. This would seem particularly appropriate for businesses like railroads (but in any event Buffett didn’t make a distinction).
An analyst starting out could do worse than follow someone like Russo’s route, with a stint at his alma mater, Sequoia. My impressions – based on a once-a-year glimpse - are that Poppe does a good job at both delegating responsibility and providing exposure for his analysts. And though Goldfarb may not be Ruane, he seems to make the effort.
One lesson even our favorite CEO's could take from Sequoia: the fund's consistent practice of giving their various people, their in-house expert analysts and next-in-line managers, floor time answering shareholder questions at the annual meeting, which really seems to head off any succession concerns anyone might have. Much to Goldfarb’s credit, shareholders get the distinct impression that all would be fine with Sequoia if he were not even there.
Back to Burlington Northern. If we look at the obvious peer group of publicly traded railroads, we can see that current market valuations are clustered in a pretty reasonable range. If we look at the underlying businesses – setting aside cash and debt for a moment – and at the pretax/pre-interest earnings those companies are generating, we see that current valuations are in the 11x EV-multiples-of-EBIT range (with Canadian National at the high end, at 13.4x).
$Billions....... MktCap..NetDebt..EV.... EBIT...EV/EBIT
CSX 27.8 7.3 35.1 3.2 10.9
Canadian National 34.6 5.9 40.5 3.0 13.4
Norfolk Southern 25.9 5.9 31.9 2.7 11.7
Union Pacific 49.3 8.2 57.5 5.1 11.2
Burling Northern ?? 10.8 ?? 4.6 ??
We can plug in the Burlington Northern pieces we do know -- $4.6B trailing twelve months EBIT – and apply a peer-level multiple, perhaps something like 11.5x – and get an EV of $53B. From that, we’d add in Burlington Northern’s cash & securities and deduct its debt (a net reduction of about $11B), and come up with an equivalent market cap estimate of $42B.
$Billions......... MktCap NetDebt EV EBIT EV/EBIT
Burling Northern 42.3 10.8 53.1 4.6 11.5
Of course, this $42B relates to the current market perception and pricing of the other publicly traded railroads. The relative tightness of the others’ valuations – they aren’t spread all over the place - might suggest that their prices could be a decent proxy for where Burlington Northern might be if it were still public. This doesn’t address the extent that the market might be too bullish or not on the group 9or the market) in general. But it addresses the current market values you were trying to estimate for Burlington Northern, in probably a more direct manner.
When we compare a privately owned (and fully controlled) business to a minority share of a publicly traded one, we might ask if we are really comparing apples-to-apples. The question, and answer, is interesting.
Berkshire paid up a premium over market (at the time) in order to acquire control – as it did with Lubrizol. But it also sacrificed something, versus being a minority shareholder holder in a publicly traded company, in the process of acquiring control – liquidity. Both control and liquidity are qualities that have value – some would argue not too dissimilar in magnitude -- and we’ve essential exchanged one for the other. In any case, we can assume it’s probably reasonable to make the public/private comparison here.
For those who might be skeptical of using EV as a basis for calculating value (and there are still those who believe, for example, that ‘P/E’ is still an appropriate valuation equation for companies like Berkshire, DJCO, etc..), we can go directly to a PE valuation for Burlington Northern. Here's the trailing 12 month income for the group, current market caps, and resultant PE’s:
$Billions MktCap NetInc P/E
CSX 27.8 1.652 16.8
Canadian National 34.6 2.240 15.4
Norfolk Southern 25.9 1.564 16.6
Union Pacific 49.3 2.903 17.0
Burling Northern ?? 2.560 ??
Using Union Pacific’s highest-of-group PE of 17, just for illustration, we come out with a similar calculated value result. Berkshire-trained shareholders would cringe at this too-often-overly-simplistic PE valuation, of course, but here it is.
$Billions MktCap... NetInc... P/E
Burling Northern 43.5 2.560 17
At a 16.5 multiple we'd be at about $42B.
With a bit of effort you could go down the line on Berkshire's major business units, and at least get an idea of how the components might be viewed in today's public markets.
pricing for a prospective private-company acquisition - we can use market data we have at hand to get us in the ballpark. Again, we’re only talking current market comparisons here – we’ll always want to take a few perspectives on our assessments of any business – but if current market comparisons are what we’re after, we might take this sort of approach.
There is a tendency among analysts to look at valuations in terms of EV/EBITDA. I’d agree that EV is a good starting point (more instructive than jumping straight to market cap), but as for EBITDA – I’d instead defer to Buffett, who’ll we’ll recall has criticized analysts who would try to pitch company valuations built off of the EBITDA level. It's often presented as a handy proximity for cash flow, especially in pitches to prospective acquirers. It's natural crutch for sellers.
Buffett's assertion has been that depreciation is a real businesses expense – the P&L manifestation of real and necessary capital expenditures – and we should be including that ‘Depreciation and Amortization’ in the earnings we’re considering. This would seem particularly appropriate for businesses like railroads (but in any event Buffett didn’t make a distinction).
An analyst starting out could do worse than follow someone like Russo’s route, with a stint at his alma mater, Sequoia. My impressions – based on a once-a-year glimpse - are that Poppe does a good job at both delegating responsibility and providing exposure for his analysts. And though Goldfarb may not be Ruane, he seems to make the effort.
One lesson even our favorite CEO's could take from Sequoia: the fund's consistent practice of giving their various people, their in-house expert analysts and next-in-line managers, floor time answering shareholder questions at the annual meeting, which really seems to head off any succession concerns anyone might have. Much to Goldfarb’s credit, shareholders get the distinct impression that all would be fine with Sequoia if he were not even there.
Back to Burlington Northern. If we look at the obvious peer group of publicly traded railroads, we can see that current market valuations are clustered in a pretty reasonable range. If we look at the underlying businesses – setting aside cash and debt for a moment – and at the pretax/pre-interest earnings those companies are generating, we see that current valuations are in the 11x EV-multiples-of-EBIT range (with Canadian National at the high end, at 13.4x).
$Billions....... MktCap..NetDebt..EV.... EBIT...EV/EBIT
CSX 27.8 7.3 35.1 3.2 10.9
Canadian National 34.6 5.9 40.5 3.0 13.4
Norfolk Southern 25.9 5.9 31.9 2.7 11.7
Union Pacific 49.3 8.2 57.5 5.1 11.2
Burling Northern ?? 10.8 ?? 4.6 ??
We can plug in the Burlington Northern pieces we do know -- $4.6B trailing twelve months EBIT – and apply a peer-level multiple, perhaps something like 11.5x – and get an EV of $53B. From that, we’d add in Burlington Northern’s cash & securities and deduct its debt (a net reduction of about $11B), and come up with an equivalent market cap estimate of $42B.
$Billions......... MktCap NetDebt EV EBIT EV/EBIT
Burling Northern 42.3 10.8 53.1 4.6 11.5
Of course, this $42B relates to the current market perception and pricing of the other publicly traded railroads. The relative tightness of the others’ valuations – they aren’t spread all over the place - might suggest that their prices could be a decent proxy for where Burlington Northern might be if it were still public. This doesn’t address the extent that the market might be too bullish or not on the group 9or the market) in general. But it addresses the current market values you were trying to estimate for Burlington Northern, in probably a more direct manner.
When we compare a privately owned (and fully controlled) business to a minority share of a publicly traded one, we might ask if we are really comparing apples-to-apples. The question, and answer, is interesting.
Berkshire paid up a premium over market (at the time) in order to acquire control – as it did with Lubrizol. But it also sacrificed something, versus being a minority shareholder holder in a publicly traded company, in the process of acquiring control – liquidity. Both control and liquidity are qualities that have value – some would argue not too dissimilar in magnitude -- and we’ve essential exchanged one for the other. In any case, we can assume it’s probably reasonable to make the public/private comparison here.
For those who might be skeptical of using EV as a basis for calculating value (and there are still those who believe, for example, that ‘P/E’ is still an appropriate valuation equation for companies like Berkshire, DJCO, etc..), we can go directly to a PE valuation for Burlington Northern. Here's the trailing 12 month income for the group, current market caps, and resultant PE’s:
$Billions MktCap NetInc P/E
CSX 27.8 1.652 16.8
Canadian National 34.6 2.240 15.4
Norfolk Southern 25.9 1.564 16.6
Union Pacific 49.3 2.903 17.0
Burling Northern ?? 2.560 ??
Using Union Pacific’s highest-of-group PE of 17, just for illustration, we come out with a similar calculated value result. Berkshire-trained shareholders would cringe at this too-often-overly-simplistic PE valuation, of course, but here it is.
$Billions MktCap... NetInc... P/E
Burling Northern 43.5 2.560 17
At a 16.5 multiple we'd be at about $42B.
With a bit of effort you could go down the line on Berkshire's major business units, and at least get an idea of how the components might be viewed in today's public markets.
