I’ve Been Workin’ on the Railroad…
November 24, 2009
I was recently struck by the Swine Flu, which had me tied up for a few days.
Since I own (rent – pay attention FCC) a DVR, I eventually found time to review a few things of interest.
On November 16, Warren Buffet of Omaha fame was on the hard hitting Charlie Rose Show. I like listening to Mr. Buffet because he has a very practical, common sense way of looking at things. If you can somehow see this episode, it’s worth a watch.
Anyhow, my new friend, Warren, spent some appreciable time talking about the recent purchase of Burlington Northern by Berkshire Hathaway for a cash sum of $26 billion.
Considering the constant analogies of railroads to fiber optics in Telecom, Warren had a bit of wisdom to share in addressing his purchase. I found his insights interesting and perhaps some company valuation experts in Telecom may care to comment on his observations.
Paraphrasing points:
1. He paid a premium for Burlington Northern and he knew he it –it’s a well run company. He will pay a premium for a well run company.
2. The value is in owning a UNIQUE hard asset as in this railroad line. Paying the premium for it was not bothersome at all per Warren. “I will get great returns.”
3. Owning the railroad tracks is a more efficient way of moving goods around – today one gallon of diesel fuel will move a freight train 400+ miles very efficiently.
4. Railroads are going to be needed for at least the next 100 years, he joked.
5. It would cost someone well over $200 billion now to build or replicate the tracks/footprint of Burlington Northern, plus the time to do it.
6. He places great emphasis on long term value of owning a hard asset over many years, given what it can produce over long periods of time and its uniqueness.
7. He does not invest in things he can’t understand in simple terms.
For all my lemming, vanilla EBITDA multiple, non-differentiated company valuation experts, all-look-alike bankers, bottom feeders and those similarly situated – please explain to me why Buffet is wrong? In parallel with Telecom?
1. Is a Telecom firm that owns its tracks of less or more valuable than one that does not? How about if the tracks are unique? Diverse?
2. How about if they own the tracks and the railroad is well run?
3. Who can carry more freight? A Telecom firm that owns the tracks or the one that does not? Which is more sustainable? More innovative?
4. How long can all Telecom firms be valued in a similar EBITDA multiple range when some are running a railroad with no tracks, some by riding on the tracks of others and some are running their railroad by government order over established railroads like the ILEC? Doesn’t each of these have differentiation, limitations and barriers in comparison with one another? How about long term risk to non-track railroads – someone who owns a railroad with tracks sells it to another railroad that has tracks except the new owner says: “No one rides my tracks anymore but me?”
5. Is there value in owning unique hard assets as Warren suggests? Or is virtual ownership less risky? Or is accounts receivable the only value? (Warren has done pretty well with the boring hard asset investing logic – don’t ya think?)
6. Should Warren have tried to steal the tracks by just valuing the Burlington Northern Business financials with no consideration for the hard assets – the tracks? Would such a move affected is reputation? Should Burlington Northern just sold the “business” but not the tracks?
I have more … but the aforementioned quick six just come to mind.
Like Warren, I think Telecom and the need for Telecom hard assets may be around for the next 100-years as well. Over 100-years of value if you own the tracks in my opinion … not some trailing twelve-month EBITDA multiple lacking any sophistication relative to the economics, strategy, positioning, infrastructure location and competitive advantage by owning the tracks. I think, like the railroads, it’s not about valuing for next quarter; it is about fair value based upon the infrastructure that makes up the railroad, that makes it different and less risky…which seems to get ignored or, unless every Wall Street analyst is, lazy.
I enjoyed listening. Not once did Warren bring up what the spreadsheet says or what the experts are thinking. I actually have an impression he actually thinks for himself based on whatever data and sources he uses. Imagine that …
If you think Warren was nuts for paying a premium for Burlington Northern perhaps some history to validate his wisdom. Many thought he was nuts in the early 1980’s after the Carter administration had collapsed the economy. Warren was out there buying all sorts of hard asset pipeline companies – the well run ones – at a premium. He made a fortune after doing so over the following decades.
Pipelines – another term often tied to fiber optic Telecom. How interesting.
Written by Dave Rusin - Telecom Executive
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A gallon of diesel fuel will move *one ton* of a freight train 400+ miles. But the train weighs much more than one ton, so it takes hundreds and hundreds of gallons to go 400+ miles for an entire train.