{"id":256716,"date":"2010-01-31T14:24:00","date_gmt":"2010-01-31T19:24:00","guid":{"rendered":"tag:blogger.com,1999:blog-3087194156628161158.post-3795372658221859276"},"modified":"2010-01-31T14:31:33","modified_gmt":"2010-01-31T19:31:33","slug":"seeking-alpha-rays-of-hypocrisy-shine-through-buffetts-burlington-acquisition","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/256716","title":{"rendered":"SEEKING ALPHA: Rays of Hypocrisy Shine Through Buffett’s Burlington Acquisition"},"content":{"rendered":"

<\/a>\"Vitaliy<\/a>
Vitaliy Katsenelson<\/a>

January 31, 2010<\/span> | about: <\/span><\/a>BRK.A<\/a> \/ BRK.B<\/a> \/ BNI<\/a> <\/p>\n

I have tremendous respect for Mr. Buffett. But every word that comes out of his mouth should not be looked upon as prophecy, or the gospel truth. I get a feeling that Buffett has been canonized into a value investor saint \u2013 investors and the media worship the ground he walks on and the air he breathes. The media are unable to get any critical quotes from his investors, and nobody wants to be caught disagreeing with the Oracle of Omaha \u2013 after all he\u2019s been right more often than wrong \u2013 and so we only get positive puff pieces. On the rare occasion when Berkshire Hathaway (BRK.A<\/a>) stock declines more than the market, you see an article asserting that \u201cBuffett has lost his magic touch,\u201d but these articles are usually followed by stellar performance by Berkshire. Though Buffett deserves admiration \u2013 he is brilliant and likable and he has achieved incredible returns for his investors over the last half-century \u2013 he should not be canonized, and not everything he does or says is the ultimate truth.<\/p>\n

Most investors agree with Buffett\u2019s criticism of Kraft\u2019s (KFT<\/a>) decision to buy a fairly valued (or overvalued) Cadbury at 22 times earnings (over the past 15 years, its average price-to-earnings ratio has been 21), using Kraft\u2019s undervalued stock. Cadbury runs a global, noncyclical confectionary business that, if properly managed, should have a very high return on capital. Buffett, a shareholder of Kraft, was very public about his dismay \u2013 he said he felt poorer when Cadbury accepted Kraft\u2019s increased offer.<\/p>\n

But though many agree with Mr. Buffett\u2019s assessment of the Kraft\/Cadbury deal, investors and media are completely ignoring Berkshire\u2019s own, $30-billion-plus acquisition of a very cyclical, capital-intensive, not terrifically high-return-on-capital business \u2013 Burlington Northern (BNI<\/a>). A railroad for which Mr. Buffett\u2019s Berkshire will lay out 18 times earnings (over last 15 years its average P\/E was 15); and to make it even worse, part of the deal will be financed by issuing what Buffett recently called \u201ccheap\u201d Berkshire stock. Burlington stock is not cheap, it is fairly priced at best, and likely overpriced. Also, Buffett owning Burlington Northern will not make the railroad business any more valuable. There is little value to be unlocked in this business, and Buffett will practice his usual hands-off approach.<\/p>\n

Though Mr. Buffett said all the right words \u2013 \u201cI am betting on the recovery of the US economy\u201d \u2013 there are some rays of hypocrisy shining through Buffett\u2019s statements about other companies (e.g., Kraft) and his own actions. He felt \u201cpoorer\u201d when Kraft made the acquisition \u2013 well, BRK\u2019s shareholders should feel poorer, too.<\/p>\n


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