Wednesday, January 17, 2018

Interview-Liberty SiriusXM

I recently was interviewed by Eric Schleien on the Intelligent Investing Podcast about one of the positions we own Liberty SiriusXM. LSXMK is one of our bigger positions and is part of the John Malone complex.

Hope you enjoy the interview!

Friday, January 13, 2017

Interesting Articles From the Week

It has been far too long since I have posted anything! The end and beginning of the year is rather hectic in this business so I have done far less reading and researching than normal. But here are some interesting things that I came across recently.

National Western Stock Show Citizen of the West John Malone

We have investments in some of Malone's companies and I find him to be one the most savvy businessmen in the world. But also a very high quality person!

Peter Thiel Explains Himself

He's a Trump supporter from Silicon Valley. And before the election was nearly the only supporter from that area.

Apple Sets Its Sights on Hollywood With Plans for Original Content

This makes sense to me. It is a big market and would hopefully give them a profit center away from the iPhone.

Warren Buffett Predicted Fall of Eddie Lampert and Sears

Retailing is tough...

Hank Paulson Interview at Stanford Business School

Very good interview. In particular I enjoyed the part about him and his wife and how they have grown together in life. (39:43)

Have a great weekend!

Wednesday, May 4, 2016

An Elephant For Berkshire, or Rather a Deere

Warren Buffett took his Elephant Gun out once last year with the purchase of Precision Castparts and there might be an opportunity to do so again soon with one of the worlds most iconic brands, John Deere. Deere & Company (DE) is absolutely the type of business that Buffett would consider for Berkshire Hathaway. It has few competitors and is easily the best business in its industry. In the United States, farmers by far prefer John Deere green to the other competitors AGCO and CNH Global (1).

Having this wonderful brand allows Deere to not just sell more tractors and equipment, but to sell them at a higher price. This is evident when you compare the average gross margins over the last 5 years. 
  • Deere = 25%
  • AGCO=21%
  • CNH = 18%
If this isn't the kind of moat Buffett is looking for then I don't know what is.
Since Deere sells most of its products to commodity producers it is a cyclical business. But, farmers and construction companies can only wait so long to replace their equipment. This causes Deere to have lumpy earnings but Buffett historically has had no problem with this if he is getting a great business. Deere is no doubt in one of those lumpy periods right now as revenues and earnings are down around 30% since 2013 when grain prices were much higher. 

Deere helps many of its customers finance their equipment. Since 2010 Deere has seen its loan portfolio grow from $17.6 billion to $24 billion. In 2002 its loan portfolio was just $9 billion. Because of its stronger financial position, there is an argument to be made that Deere would benefit from being part of Berkshire Hathaway. 

The farming industry has been going through dramatic changes in recent years seeing larger and more sophisticated equipment. Many of the functions such as planting, driving a grain cart, and harvesting are now automated. It is very possible that 10 years from now a person is not required to physically operate the equipment. Because Deere has much higher margins and profits than it's competitors it will be able to allocate more money to developing these technologies, thereby increasing the massive moat it already has.

John Deere Self-Driving Equipment (CBS Special)

Normally I prefer using owner earnings to figure out the earning power for the business but for Deere that is rather difficult. Deere finances a lot of their customers equipment themselves. This causes much of Deere's cash from operations to flow into these leases. For Deere I actually consider earnings per share (EPS) to be a good proxy for the company's earning power. Below is a graph showing Deere's EPS from 1998-2015.

Berkshire recently purchased Precision Castparts, an aerospace parts supplier, for $32 billion. PCP was making about $1.6 billion at the time of the purchase. This means Buffett paid 20 times earnings or accepted a 5% earnings yield on this investment. PCP is nearly certain to have higher earnings in the future as it is a fantastic business and I think this stretched the limits of how high Buffett is willing to pay up for a great business.

The idea to purchase Precision Castparts for Berkshire came from one of the new investment managers, Todd Combs. Todd first bought PCP for his Berkshire investment portfolio in the 3rd quarter of 2012. Just before the 4th of July in 2015 Mark Donegan, the PCP CEO, stopped by Berkshire to meet with Todd and at the end of the meeting Buffett stopped in to chat. He was very impressed by Donegan and asked Todd Combs to see if the board of PCP would be receptive to an offer from Berkshire. Buffett has committed to never doing a hostile takeover so this is very important. The board was receptive, Berkshire made their $235 per share offer, and they accepted the offer.

In interviews Buffett makes it seem like he didn't really follow the company that closely but I would say that is extremely unlikely. Though he allows Todd and Ted to make their own investment decisions I'm sure he keeps up with the businesses they own as that is his favorite hobby! Once Buffett realized how good Donegan was as a manager I think it was an easy decision for him to make an offer.

Todd and Ted


Berkshire currently owns a $1.9 billion position in Deere. Todd and Ted manage $9 billion for the company so this would make it a 21% position for one of these managers. I think it very possible that a situation similar to Precision CastParts could happen if Deere's board of directors is open to an offer. If they are not it is a non-starter and Buffett won't pursue a deal any further.

Because of Deere's cyclicality I don't believe Buffett would pay the high premium he did for PCP. But I think it is reasonable that he would accept a 7% earnings yield vs 5% for Precision Castparts. With earnings of $5.77 in 2015 this means Buffett would be willing to pay around $82 ($26 Billion) to purchase the whole business. Right now that is where the stock is trading so it is unlikely that there is a deal to be made as the board would want a premium to the stock price. If the price were to decline to $70 or less I think it is very possible for the wheels to get turning on Berkshire making an offer.

Berkshire Hathaway currently has about $43 billion in cash on it's balance sheet. $23 billion of that can be used for a deal as Buffett has said he will never go below $20 billion. With a market cap of $26 billion, Deere is the right size for Berkshire to be able to handle comfortably with a small debt issuance or waiting a few more months for cash to pour into Omaha.

Right now there is probably not a deal to be made for Berkshire purchasing Deere, but it is getting close! In summary:
  1. Deere is a great business with a strong moat and is almost certain to be making more money in 10 years.
  2. If the Deere board is open to it, Berkshire might make an offer.
  3. I don't believe an offer would be for much more than $82 so the stock probably has to trade down to around $70 for a period of time before one would be made.

John Deere S690


Disclosure: No position in Deere



Saturday, March 26, 2016

Berkshire Hathaway Investment Analysis

Right now I am not finding a lot of very interesting, or cheap, investment ideas. Most companies are valued pretty fairly, or appear over-priced to me. But one big exception is Berkshire Hathaway. It has so many high quality businesses with great long-term prospects that it should really be priced higher than it is. I have talked about this with my clients, as it is currently the largest position in our investment portfolios. Below is what I wrote them about Berkshire in 2014, but the numbers have been updated for 2015.

Berkshire Hathaway (BRK-B)

It should be of no big surprise that Berkshire would end up in the portfolio at some point. Warren Buffett, with help from Charlie Munger, has the best long-term track record of anyone in the investment business. Berkshire has grown book value at 19.2% compounded over the last 51 years, or a total of 798,981%. To put this in different terms, Warren Buffett and his BPL partnership bought their first shares in Berkshire for $7.50. Those same shares are now worth $210,530.

Obviously Berkshire has had a fantastic past, but what we care about is the future. The businesses are best described in Warren Buffett’s annual letter to shareholders, which can be found at I think that the 2014 letter was his best by far, as he talked about the history of Berkshire and what him and Charlie think the future holds. I will give a brief description of the businesses below.

The Insurance business is what has fueled Berkshire’s massive growth over the years. It is represented by Berkshire Hathaway Reinsurance, GEICO, Gen Re, and Berkshire Hathaway Primary Insurance Group (a collection of insurance business). If these insurance businesses generate more premiums than claims in a given year then they essentially are able to hold large amounts of money for free. This is called float, of which Berkshire has about $88 billion. Berkshire then invests as much of this money as it can, in common stocks or wholly owned businesses. In 2015 the Insurance group contributed about $1.8 billion in underwriting profit or about 7% of earnings for Berkshire. This does not count the earnings from the float which are much more.

The next largest business is the Burlington Northern Railroad which contributes about 22% of my estimate of Berkshire’s owner earnings (profits) in 2015. The BNSF operates one of the largest rail networks in North America, mostly in the western United States. Since it was purchased in 2010 by Berkshire it has seen its earnings grow dramatically from about $2.2 billion to $4.9 billion last year. This will be an extremely important asset for Berkshire for many years.

Berkshire Hathaway Energy is one of the biggest energy companies in the United States. BHE is an owner of power companies in Oregon, Utah, Nevada, and Iowa. This is a business that provides about 10% returns to Berkshire that is almost guaranteed to be around many years in the future. Charlie Munger believes that BHE will become the largest power company in the US in a few years. The energy business contributed earnings of $2.2 billion or 9% of earnings.

The last part of Berkshire is a large collection of businesses that sells everything from cowboy boots, to chocolate, Dilly Bars, and industrial parts. Most of these companies enjoy strong positions in their markets and have bright prospects for the future.

Berkshire is a very unique company to value because of its large common stock portfolio, $112 billion at year end. What is unique is that all of these companies are essentially minority interests in businesses that Berkshire owns. But, the only “earnings” from these businesses that show up on Berkshire’s financial statements are the dividends that are paid. Thus, Berkshire has a large amount of what Buffett calls “look-through earnings”, essentially all of Berkshire’s portion of the earnings that aren’t paid as dividends. Some of the companies that Berkshire owns in it's common stock portfolio are Wells Fargo, American Express, US Bancorp, IBM, John Deere, IBM, and Coca-Cola.

To figure out the look-through earnings for Berkshire’s investments I calculated the owner earnings attributable to Berkshire for each company it owns stock in. Then subtracted out the dividends paid to Berkshire. After these calculations I found that Berkshire has about $5.7 billion of earnings that are not reflected on its financial statements.

In 2015 Berkshire generated $32.7 billion in cash and had to spend about $9.2 billion in capital to maintain its various businesses. If we add in the “look- through earnings” Berkshire made about $29.3 billion or $11.87 per B share. In 2009 this figure was about $6.15 and in 2004 $3.65, meaning that Berkshire has been doubling earnings about every 5 or 6 years.

In addition, Warren Buffett has said that he will not allow Berkshire to have less than $20 billion in cash. Berkshire currently has $61 billion. $22 Billion of which will be used to purchase Precision Cast Parts. This leaves us with $19 billion in excess cash that will be invested at some point, providing future streams of earnings. I will break this down into easier per share numbers below.

Class B Per Share figures for 2015:

Owner earnings= $11.87
Excess cash     = $7.78
Current price    = $140

We will subtract the cash from the stock price because that money will generate future investment returns for us. We do not know when this will be, but we can all but guarantee that it will happen because of who is running the company.

Effective Price=$132.22
Effective Initial Rate of Return= $11.87/$132.22 = 9.0%

If we owned Berkshire as our own private business, we would be buying a business that has recently doubled earnings each of the past 5 years that is managed by the investor with the best long term track record. If earnings continue to grow, a highly likely proposition, then intrinsic value will likely grow at a similar rate. In a world where not very much looks interesting, I believe this represents a great investment.

If Berkshire doubles earnings again in 6 years it will be making around $22 per share. If we get that same initial return of 9% that we are getting now that would value the company at around $244 giving us a 12.3% average return. Because of the high quality of the businesses and its managers I believe Berkshire deserves a higher price in relation to it's earnings than 9%. If that happens we would get even better returns.

Fortunately, it is not just me that thinks Berkshire is cheap! Warren has said that he will only buyback stock when it is "significantly undervalued" and for Berkshire he will buyback stock at 1.2 times book value. Currently 1.2 times book value per B share is $125.89 and very recently the stock price was trading close to that. We are a bit about above that now at $140 or 1.33 times book value. When the stock is trading close to where Warren thinks its cheap, it probably is. 

This is not to be taken as investment advice, but is for informational purposes only. I am not making a recommendation to purchase shares in Berkshire Hathaway. Please do your own research.

Tuesday, December 22, 2015


My History With DAKT

Daktronics is one of the first public companies that I really started paying attention to. It is one of the largest and probably the most well known public company in South Dakota. I went to college for my first two years in Brookings at South Dakota State University, where Daktronics is based. That is where I met one of my heroes in life, John Sondey. John was an economics teacher whose true passion was investments. Fortunately, as a Freshman in college I met him and he noticed my interest in the stock market. Then he allowed me to take his investing class that was normally reserved for seniors. This was really the beginning of my formal education in investing. During the class he let us invest $12,000 of his own money in 6 different stocks. At the end of the semester if we made money, we gave half of the proceeds to the local food shelf. The other half of the proceeds were distributed to the students in the class! After the last class of the semester that money was promptly reinvested in the local downtown establishments.

Since Daktronics was based in the same town, and had so many connections to the University, it was often a topic of conversation in class.

Company History

Drs. Aelred Kurtenbach and Duane Sander founded Daktronics in 1968 while they were professors of electrical engineering at South Dakota State University. The company has always maintained a close relationship with the University which has been able to provide it with highly trained engineering talent and other full and part-time employees.

The companies first product was a voting system display that was sold to the Utah Legislature in 1970. In 1971 it expanded the business into scoreboards and in 1973 into commercial displays. The company continued to innovate and in the 1980's successfully sold scoreboards for the 1980 Olympic Winter Games, college athletic facilities, and its first major league facility. In the 1990's the company successfully implemented LED technology into it's video boards and expanded into further product lines. In 2002 the company had its initial public offering and was the world market share leader in LED video displays with over 26.5%. Their market share has since grown to 29%(1). The New York Times had a great feature on the company in 2014.

The company has a large percentage of insider ownership and it seems that it is mostly controlled by the founder Aelred Kurtenbach and insiders. Reece Kurtenbach, Aelred's son, is the current Chairman of the Board and CEO of the company. Jim Morgan, the CEO from 2001-2013, owns a sizable stake in the company and is on the board of Directors.

Ownership % Shares Value
Dr. Aelred Kurtenbach 5.2% 2,277,392  $   20,769,815
Reece Kurtenbach 1.0% 417,223  $     3,805,074
Jim Morgan 3.4% 1,490,456  $   13,592,959
DAKT 401k Plan 5.7% 2,495,664  $   22,760,456
Shares Out    43,762,596
Share Price  $           9.12

Business and Segments

Daktronics reports its' figures in 5 different business segments: Commercial, Live Events, High School Park and Recreation, Transportation, and International. Below is a brief analysis of each.


You might find these display systems at gas stations, restaurants, casinos, amusement parks, or even in Times Square and the Las Vegas Strip. These displays are typically used to inform customers of events or prices. This business represents about 27% of Sales for Daktronics. It's Gross Margin is also 27%. This part of the business has been seeing larger and more customized displays being built in recent years. I suspect it is likely that this trend continues in the future as displays get better and more dynamic. This business has produced consistent profits overtime, with the only anomaly being in 2009.

Live Events

These are the largest and most dynamic of Daktronics video display systems. You will see these in most of the large stadiums in the United States. Some examples include Sports Authority Field at Mile High (Denver Broncos), Levi's Stadium (San Francisco 49ers), and Target Field (Minnesota Twins). New stadiums are building larger video boards than ever and it seems that this trend will only continue. The expected lifetime of this equipment is 8-12 years so once installed their is a natural replacement cycle provided Daktronics can win the job again.

Not only are they building large video boards for replays, but stadiums are adding many smaller banner type boards for advertising and other purposes. For example, the group that owns the Denver Broncos stadium expects a 2 to 3 year payback from advertising revenue on the banner displays they recently installed in their stadium. With such strong returns it is not wonder that other stadiums have been purchasing these boards as another source of revenue. 

This business sometimes has lumpier sales just because of the timing of large stadium projects. It currently represents 38% of Sales for Daktronics. It does have lower Gross Margins than the Commercial business though, coming in at 18% in 2015.

High School Parks and Recreation

Daktronics is one of the leaders in providing scoreboards for high school athletic and theater activities. This was one of the first businesses that the company entered and has had rather stable sales overtime. Like in the other segments, schools are seeing value in higher end scoreboards for advertising. They are also being adopted as message centers for students, faculty, and community members. This segment represented 11% of Sales and maintained healthy 32% Gross Margins in 2015.


The Transportation business builds signs for roadways, airports, parking structures, and various other applications. I see their signs all of the time on my way to and from the Minneapolis-St. Paul Airport. Historically this has been one of the higher margin businesses for Daktronics. Their Gross Margins have generally been around 30%. This is the smallest business unit though with just $48 Million or 8% of company Sales. I believe the company has a good future in the business as the world adopts more intelligent transportation systems and improved communication systems for travelers. Unfortunately, this segment has more competitors than some of the others so it's growth might be mitigated.


The company includes all business sales internationally in one unit so it is hard to get true clarity on the mix of products. The company says that commercial video systems, digital billboards, and transportation systems are their main products. The large US style Live Events scoreboards have not caught on in the rest of the world yet. Particularly with Soccer stadiums in Europe and South America. FIFA seems to be concerned about crowds becoming agitated over replays, and not having undue influence on the referees. I suspect this will change as stadiums try to improve the fan experience. I know in the US the use of the large billboards is much appreciated by the fans, but time will tell. The company has been growing very nicely internationally, increasing Sales from $51 Million in 2008 to $102 Million in 2015. 

Competitive Advantage

I believe that Daktronics has a pretty good competitive advantage. It is certainly not a great one like Visa has but it isn't a terrible one like Airlines historically have been. I would say it is somewhere just above average. The market had about $2.1 Billion in Sales in 2014 and Daktronics has a 29% market share with the closest competitor having just 9% of the market. They operate in a very niche industry that requires rather specific engineering expertise and I think this would be difficult to replicate in a short amount of time. Also, the margins are pretty good but not super high. Thus, I don't see a good reason for another company to pour hundreds of millions of dollars in plant and equipment to try and compete. 


And now the most important piece of the puzzle. Over the last 10 years Daktronics has experienced rather lumpy financial results. Despite this, Sales have grown from $230 Million to $615 Million or 10.3% compounded. Owner Earnings Per Share meanwhile have not grown at quite that rate, only about 6% compounded.

Cumulatively, over the last 10 years I estimate that Daktronics made $6.10 and paid $3.05 of that out in a dividend. In 2015 I think Owner Earnings Per Share were around 63 cents (different from the the graph) as their were some abnormal working capital changes.

In the last 5 years the company has decided to pay most of their free cash out in a dividend. While this is not necessarily a bad thing, I tend to prefer a company that can reinvest in its own business. Daktronics has built new plants and added production lines in recent years, but has had the fortunate "problem" of having extra cash around.

I am glad that the company has not repurchased stock. Because, for the most part over the last 10 years the stock was not significantly undervalued. I do question whether they could have made an acquisition that would have helped the company. Maybe a supplier or one of their competitors. I cannot criticize this point to hard though as I do not have a good idea of what that acquisition might be.

In the future I expect Daktronics to continue to grow Owner Earnings Per Share at about 5-8% rate compounded, though this will be lumpy. I also expect the company to continue to pay out most of it's excess cash in a dividend as that seems to be the desire of the founders and management that are on the board of directors.

I believe Daktronics Intrinsic Value is around $7 per share so I would like to purchase it at a good discount to that. Currently shares trade at $8.86. Not excessively higher than my estimate of Intrinsic Value but not at a price that I find interesting. If the stock prices comes down a ways below $7 there is a good chance I would be purchasing shares in Daktronics.

Happy Holidays!

Monday, July 13, 2015

Powder River Basin: Part 2

The Powder River Basin has been one of the most important energy assets for the United States over the last 45 years. But now its future importance appears to be declining. In 2011 coal production peaked at 426.4 million tons but by 2014 had decreased to 381.2 million tons. I believe that further declines in production seem likely as more utility companies are producing energy from natural gas, wind, and solar power. In this second piece I am going to speak briefly to the valuations of some companies that have significant operations in the Powder River Basin. Unsurprisingly, they have all been negatively affected by the declines in coal prices and production.

Black Hills Corporation (WyoDak Mine, BKH)

The WyoDak mine is the longest continuously operated surface mine in the United States. The mine was started by the Homestake Mine Company of Lead, South Dakota and was sold to the Black Hills Corp in 1956. WyoDak is very unique in that it uses a conveyor belt to move the coal out of the mine. As opposed to coal haul trucks like in the rest of the Powder River Basin. The WyoDak mine is also unusual in the fact that not all of the coal is loaded onto trains. Rather it is fed directly to the 335 MW WyoDak Power Plant, which is 20% owned by Black Hills Corp. The other 80% owner of the plant is PacifiCorp, a Berkshire Hathaway Energy subsidiary.

Black Hills Corp owns 16 power plants that generate 841.1 MW in Colorado, Wyoming, and South Dakota. The WyoDak mine represents about 9% of the overall company’s energy production. Utilities are unique businesses in that their rates are regulated by the various utilities commissions of the states they operate in. Because energy use has increased in the past these utilities must expand their operations (capital expenditures). Generally, the state utility commissions allow the utilities to earn about a 10% rate of return on these new investments. Thus, utilities earnings are normally very consistent and easier to predict than some other industries.

In 2014, Black Hills Corp had net income of $129 million or $2.90 per share (in this case net income is a good proxy for earnings). Currently, the stock price is $46.02 for a market cap of $2.06 Billion. Thinking about this as a private investor, I would be accepting an initial return of 6.3%, for a business that will likely grow its earnings by 10% per year in the future. This is not cheap enough to be interesting for me. Now 4 years ago when it was selling for $29, it would have been.

I am not a merger and acquisitions expert but Charlie Munger had an interesting quote at the Daily Journal Meeting in Los Angeles last year.  

“Berkshire will have the biggest utility business in the U.S. in a few years. It will be OK to make 9-10% returns, with 0% float money with interest rates at 0. They (shareholders) will live that it isn’t 12%.”

Given that PacifiCorp already has a business relationship with Black Hills Corp. and Berkshire wants to acquire utilities it would not surprise me to see Black Hills Corp be acquired by Berkshire at some point in the future, albeit probably at a lower stock price.

Cloud Peak Energy (CLD)
Cloud Peak Energy is the only publicly traded, pure play, Powder River Basin mining company. The company was originally part of mining giant Rio Tinto but was spun-off in 2010. In 2014 Cloud Peak operated 3 mines in PRB and sold 87.1 million tons of coal, which accounts for 23% of the production in the basin. The decrease in coal tons sold and coal price has hurt earnings significantly. In 2012 the company had $173 million in net income yet this has decreased to $78 million in 2014. 2015 is looking even worse. The stock price has followed suit decreasing from $20 to $4 (-80%), for a market cap of $240 million.

Predicting the future earnings of Cloud Peak is rather difficult. With coal usage likely in a secular decline the company may continue to struggle in the future. The company looks cheap when looking at past earnings, but for now I have to put this in one in the “too hard basket”.

Union Pacific (UP)

The Union Pacific is one of the two largest Class I railroads in the United States. With the lowest operating ratio, 63.5%, UP is arguably the best managed railroad in the industry. The company derived 18% of its revenues from the coal business in 2014. Coal from the Southern Powder River Basin, including Cloud Peak Energy coal, makes up the majority of this business. In 2015 Burlington Northern Santa Fe, UP’s biggest competitor, had some big issues delivering its customer’s goods on time and lost market share to Union Pacific.

In 2014 I estimate that UP had owner earnings of $4.7 billion or $5.23 per share. With the current stock price of $95.85 we would be accepting an initial return of 5.4%. UP does not interest me at this stock price. Especially when you take into account that the business is operating at a world class level, at some point all businesses make mistakes or run into problems. The coal business also generates some concern because if there is a secular decline then those revenues will have to be made up elsewhere. This year coal carloads are down 7% but revenues are only off 5% because of increased prices. Now, I don’t think Union Pacific will have major problems with its business overall. But, they may struggle to grow the business at an exceptionally high rate like in the past.

Rail Link (Genesee & Wyoming, GWR)

One would think the Union Pacific and Burlington Northern train engineers would just drive their trains right to the coal mines to load the coal, but that is not the case. As I mentioned in the previous post, the engineers stop their trains and hand off the driving responsibilities to the employees of Rail Link. The Rail Link engineers then communicate with the coal loading facility and set the train at the appropriate speed, between .5 and .7 mph, for loading. The coal is then loaded onto the continuously moving train. This process usually takes between one and two hours. Once the coal is loaded, the engineer drives the train to the appropriate spot and hands off the train to the Class I railroad engineers.

The Rail Link coal loading business is only a small part of its parent company, Genesee & Wyoming. For the G&W the non-freight business represents 24% of revenues, which is also split between the company's industrial switching and port operations. The exact numbers for each division are not disclosed. The other 76% of revenues come from the short-line railroad freight business that G&W is known for.

In the last 15 years the G&W has purchased 98 short-line railroads. These are mostly located in the US but they also have operations in Australia and as of very recently Europe. As one might guess, the company has seen spectacular growth in Earnings Per Share. When the company IPO’d in 1996 they had EPS of $.29 and by 2014 EPS had grown to $4.58 for a compounded annual growth rate of 15.6%. This is one of the fastest growing businesses I have seen over a long period of time and obviously the managers have done a great job of managing all of the new acquisitions.

 In 2015 the company has seen revenue and earnings growth take a pause, because their freight coal and coke carloads have declined 34.4% year over year. But they did just acquire Freightliner, a European rail company, which should increase earnings for the year. Once that acquisition is completed I believe that GWR will have normalized owner earnings in the $6.10-$6.60 per share range. Currently the stock price is $75, for an initial return of between 8.1-8.8%. For a fast growing company this is starting to look interesting.

There is an important caveat though. The company’s debt is in term loans which adjust with interest rates and are mostly due 3-5 years from now. If interest rates go higher this could slow growth from the very high rates we have seen in the past. Also, the short term nature of the debt could potentially cause problems if credit is not easy to obtain. Because of this risk I must wait for a lower stock price than what it currently is at. I will admit it is getting close though.

Burlington Northern (Berkshire Hathaway, BRKA, BRKB)

As you can see from the map the BNSF and the Union Pacific have a very similar geographical footprint, mostly the western United States. Not surprisingly, they are very similar companies in size, measured by revenues and net income. The BNSF has a slightly higher mix of coal car loads (+4%) and intermodal car loads (+2%) than UP. While UP moves more chemicals and industrial products (+4%). 

Despite being tough competitors both companies have increased EPS by large amounts over the years. In just the last 4 years, UP increased earnings by 20.1% compounded annually and 108% in total. BNSF increased earnings by 13.3% compounded annually and 65% total during that time. BNSF likely would have been able to boost the EPS numbers more by repurchasing shares, but in 2010 it was purchased by Berkshire Hathaway.

The BNSF contributes 11.7% of revenues and 22.1% of net income for Berkshire and will be a very important asset for years to come. Because of the many operations of Berkshire Hathaway I will wait for another post to analyze the company in its entirety, stay tuned!

Thursday, June 11, 2015

The Powder River Basin and Fly Fishing: Part 1

Sometimes you just have to get out of the office and get away from things so you can think clearly. While some investors are very successful simply working out of their office I find that I do some of my best thinking when I am out of my element or visiting a place and experiencing something new.

While I was growing up I was fortunate enough to take a summer vacation with my parents out West every year. Wyoming was always one of our favorite places to visit because of the breathtaking scenery and the outdoor activities. We enjoyed it enough that we nearly moved there once! As you enter Wyoming on Interstate 90 from the East you drive past miles of trains and large coal mines. I was a little obsessed with trains as child and I was also amazed by the size of the mines! I’ve always thought it is pretty crazy to think that we can completely change the landscape of earth.

For the last couple of years I have wanted to go back and take a tour of the coal mines. Yes there are a lot of Youtube videos out there, but there really is something to be said for actually SEEING the sheer size of the operations up close. In addition, there are a number of companies that I have researched that have significant operations in the area including Cloud Peak Energy, Burlington Northern Santa Fe (Berkshire Hathaway), Union Pacific, Rail Link (Genesee & Wyoming, a short-line railroad company), and Black Hills Energy (largest company in South Dakota).

I am going to break this blog into 2 parts because there is a lot of content. I guess I learned a lot last week! The first part is about the Powder River Basin, and its significance for the United States. I will also talk briefly about my fishing adventures while I was traveling. Part 2 of the blog, which will be released soon, will give a brief analysis of some of the companies that operate in the Powder River Basin. 

The Powder River Basin 

Coal is the largest source of electricity for the United States, representing about 39% of total electricity production. The Powder River Basin (PRB) produces 40% of the coal used in the United States. In short, between 10-15% of US energy production comes directly from the PRB. In the early 1970’s the Energy Information Administration began to realize the environmental effects of high sulfur coal, notably acid rain, which has traditionally been mined in the eastern half of the United States. The EIA then started a push for mining in the Powder River Basin. While relatively low in energy content compared to eastern coal, the coal that is produced in the PRB is very low in sulfur content.

The Belle Ayr Mine started production in 1972 and was the start of PRB mining era. In 1972, Wyoming produced about 10 Million tons of coal. Just 10 years later this had grown to 140 Million tons. By 2011 production in the Powder River Basin peaked at 426.4 million tons! Since then production has been decreasing. In 2014, 381.2 million tons of coal were produced in the basin.


Most of the coal seam in the PRB is 100 feet underground. In order to get the coal out of the ground, the land (overburden) must be dug up and moved. Draglines (large excavators) shovel the earth in their buckets and place it into massive dump trucks. These Draglines are among the largest pieces of machinery in the world and cost upwards of $100 Million each!

I am standing in an old 24 ton bucket. Some of the new buckets, like the one white ones shown below can move 80+ tons of material! 

Once the overburden is removed and the coal can now be excavated. Oftentimes the coal and land must be broken up to make excavation easier. This is accomplished with the use of explosives, mostly ammonium nitrate because of safety in transportation and its cost advantage over explosives like dynamite. Explosives teams drill holes and set the charges into the coal seam. The charges are then detonated and the Draglines go to work loading the coal into the coal trucks and overburden into other haul trucks. These trucks are true modern marvels. The Alpha Mine, where I did my tour, uses mostly 793 Caterpillar trucks that cost about $4.3 Million, hold 1,200 gallons diesel, and can carry 253 tons of material!

Next the coal trucks drive the coal to the loading area where it is dumped. At the Alpha Mine this was about 2 miles away. Once the coal is dumped it is then tested for its heating and sulfur content, and various other quality issues. Some Utility customers want different characteristics in their coal so the mine employees test and determine the characteristics of each batch of coal. Next they must prepare and organize coal with the correct quality characteristics to load onto the trains for the customers. Trains are loading coal 24 hours a day so this must be a relatively complicated task. Once the batch of coal is prepared it is sent on huge conveyor belts into silo's where it will be loaded onto the trains.

Above is a picture of a truck preparing to dump and the loading facility in the background.


Coal is moved around the country by two main Class I railroads, the Burlington Northern Santa Fe and the Union Pacific Railroad. These railroads drive their 110-120 car unit trains into the PRB, but not all the way to the mine's loading facility. As the trains get close to the loading facilities the Class I engineers exit the train and hand off the driving duties to employees from Rail Link, owned by Genesee & Wyoming, a short-line railroad operator. The Rail Link engineers then communicate with the mine's loading facility to set the correct speed for loading the train, between .5 and .7 mph. The coal is then loaded into the rail cars as the train continues to move.


A BNSF Locomotive and coal being loaded into the train cars.

After the coal is loaded it is then sprayed with a dust suppression agent. Once the train exits the loading facility Rail Link hands the train back to the Class I carrier and it heads off to the Utility customer. It takes between one and two hours to load a whole unit train but between seven and eight to unload. Weird right? This is because each rail car must be turned upside down and emptied! Once the train is emptied it leaves the power plant and starts its trip back to the Powder River Basin.

Fly Fishing

The other part of my trip was to enjoy one of my favorite pastimes, which I have not made time for in the last few years. When I was young I was fortunate to have an uncle who was an expert fisherman. Fortunately I picked up a little bit of his wisdom and joy for fishing. 

It was extremely nice to be disconnected from the internet and my cell phone and just enjoy nature. Even if it was just for 24 hours. I find that I do some of my best thinking when I just get to relax and not be distracted. And this time must have been productive because I came home with a lot of new items on my to-do list!

The water was very high and there was flooding in much of the Black Hills. So I knew my stream selection would be limited to the uppermost portions of the streams. Fortunately, the people at Dakota Angler & Outfitter Fly Fishing in Rapid City helped me pick out some good Nymph's and sections of some streams to go to. 

Sometimes the fishing crowd can rather secretive about their tactics, but I have always found the exact opposite with the Fly Fishing crowd. In this case I fished next to a fellow angler who fishes the area rather often. I wasn't catching much right away, so he insisted that I come up next to him (I'd seen him catch at least 8 fish in 45 minutes). And of course I started catching fish right away. Funny enough he worked for the Burlington Northern Santa Fe, so I peppered him with questions all day. I had a wonderful time fishing with him and exchanging stories. It really was perfect quick getaway. 


The trout that I caught and some of the scenery in the area.

And here is a video of me catching and releasing a Rainbow Trout.

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