November 7, 2009

BNI buyout by Berkshire

Berkshire acquired BNI earlier in the week for $100 consideration. I will not detail the offer as most media have done it with better detail. However the post is about my view and my future action.

First my view on the transaction. I am really disappointed that BNI is going private, you can read my posts on the company here. I had visions 10 years down the road to see my investment in BNI to have risen by 1000% or more, so to be deprived from such investment, to say the least, is disappointing, albeit my return from holding BNI is 50% plus dividends, so I am always thankful.

The price is low relative to the value of BNI. BNI has tremendous land holdings that are not realized in its balance sheet. Also, BNI is not just a good business with competitive advantage, it is a protection against inflation and oil prices. BNI does well when oil is high or low. When oil is high their rates go up in lock step however if oil prices are declining so is their costs. BNI also is a good hedge against inflation as it rates and assets can compensate investors for rise in prices.

Second, I will opt to take the cash. I do not understand Berkshire and Buffett is not going to last forever. To preempt any comments, I did not say Berkshire is bad business but it is too complicated for me, that is all.

Thrid, I will tender my shares for cash rather than sell due to several factors:
  1. I want to postpone my capital gains till next year,
  2. in the unlikely event the acquisition fails,
  3. I am not leaving $3 on the table, and
  4. There is a dividend payout coming up before closing that I want.
Fourth, BNI represented more than 10% of my portfolio so I will have a lot of cash coming back to me to reinvest and that creates some problems. First, the market is at fair value which makes finding ideas a bit difficult. Moreover, the risk in this market is to the downside currently. Second, most railroads have shot up on the acquisition so replacing BNI with another will be difficult as a lot of people are emulating Buffett and bidding their prices. I do not like crowded trades. But I will follow some railroads to take advantage of any weakness. Two of my favorites are Canadian National (CNR) and Union Pacific (UNP). I am also looking at Canadian Pacific, where it could see some improvements in margins with better management. Third, good ideas like BNI are rare.

The other alternative is to invest in Intermodal companies. Those companies use multi modes of transportation on behalf of shippers to get goods to their destination. Intermodals obviously need access to the rail networks through agreements with railroads. Some Intermodal companies own a fleet of trucks to handle what is called last mile transport or the final link from rail to the buyer, or can contract this out to independent truckers.

Pacer International (PACR) is
...asset-light North American logistics provider. The Company provides transportation and logistics services to numerous Fortune 500 and multi-national companies. The Company provides its transportation services from two operating segments, its intermodal segment, which provides intermodal transportation services principally to transportation intermediaries, beneficial cargo owners and international shipping companies who utilize intermodal transportation, and its logistics segment, which provides truck brokerage, truck transport, supply chain management services, freight forwarding, ocean shipping and warehousing and distribution services to a range of end user customers.
Pacer had a bad run lately as its contract extension with Union Pacific, where the majority of its freight revenue come from, was uncertain and weighted on the stock heavily. I liked that situation. I bought at $3.16 last week to take advantage of investors flight due to uncertainty. Although the stock has shot up some 50% since their earnings and contract renewal two days ago, I think the potential to move to $8-10 per share is reasonable.

I admit I did not finish buying to establish my desired position and rather to have bought before the move but the risk/ reward thesis is still valid. The stock should drift higher as investor buy again into it after the uncertainty has been removed.

I will share more thoughts on Pacer some other time.


Boyan said...

I have always liked your analysis, though I rarely follow it... a behavior I should most definitely change. However, currently I am waiting for the other shoe to drop. Back in May I converted all my stock holdings to debt or cash, though not with the funds you recommend. However, I am getting more and more concerned that when we get into second dip of the recession, as we will most definitely do over the next year, interest rates will go up and my bond holdings will take a beating of the same order of magnitude as stocks will. Other than going to money markets, are there any other plausible options you are considering for such a scenario?

Sami said...

hi thanks for the complement.

I simply do not know what will happen next. L,V, U or W shape is something I can't call and no one can. so I do not pay much attention to it when picking positions. To invest I will accept certain risks and that is the game.

If interest rises and another dip occurs equities will not do well and debt will not do well.

Bank loans and preferred floaters might do well as their rates reset with rising rates.

Btw do not follow me, all I am given is an idea for you to explore it further and formulate your own opinion.

Anonymous said...

Are you adding to your position in PACR at these prices?

Sami said...

I am holding a bit and reanalyzing the situation. The drop is a bit unexpected after they signed with UNP. so I want to see if I missed something.

The company will lose some business as a result of the deal with UNP, I will have to see how their cost structure in the next earnings report will be and what initiatives the company will take to cope with reduced volume.

The problem is Pacer has very thin margins and high variable costs. so reducing business level is not an issue as the variable costs will disappear with it. But that leaves what fixed costs they have to be absorbed across smaller number of freight/ business.

Another risk is they contract out their trucking, which is a good thing as they will not have to deal with fixed assets. However, contract out means less margins and less reliability in the eyes of customers. Right now the capacity in the tucking industry is abundant but what will happen when demand for tucking picks up. Companies like JB hunt have their own tucking, which is an advantage in high demand times and disadvantage in lower demand periods.

So these are the two issues I am concerned with. I made a bet that they will resign with UNP and the stock would go up as a result that did not happen so I have to revalue.