NBR Transcripts-November 3, 2009
Tuesday, November 03, 2009Warren Buffett Buys Burlington Northern for $34B
PAUL KANGAS: The Oracle of Omaha has spoken and the news is good. Famed investor Warren Buffett is buying the Burlington Northern Santa Fe railroad as an upbeat bet on America's future. His Berkshire Hathaway Corporation is spending $34 billion to buy the remaining shares it doesn't already own. Erika Miller has more on why Buffett is making such a bold move.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: There's nothing like owning your own train set. And while most people think in terms of the toy version, billionaire investor Warren Buffett is buying the real deal. Make no mistake, Buffett's purchase of Burlington Northern Santa Fe is far from frivolous. It's a calculated bet on a recovery in the railroad industry, something analyst Kevin Kirkeby says is not yet underway.
KEVIN KIRKEBY, GROUND TRANSPORTATION ANALYST, STANDARD & POOR'S: What the rails are providing is confirmation that things are stabilizing. They are not saying that things have turned the corner and we're going to have gangbuster growth.
MILLER: Buffett has been investing in railroad stocks for years and freight loadings are one of his favorite economic indicators. Though Union Pacific is bigger, analysts say Burlington Northern is the best in breed, something Buffett looks for.
KIRKEBY: He's buying the railroad that probably has the best reputation in terms of management, in terms of management who is willing to push for technology, push to try new things. So in that regard, yes, he is buying the best of the rails.
MILLER: But it's not just about the rails. Buffett says the Burlington Northern deal is quote, an all-in wager on the economic future of the United States. Investment strategist Jim Awad says that's a big vote of confidence.
JAMES AWAD, INVESTMENT STRATEGIST, ZEPHYR MANAGEMENT: I think what he's probably saying is the economy has turned. In some cases that is not reflected in the stock price. And therefore I'm going to move now because cyclically the economy has turned, secularly the economy is attractive and this particular security in my view is attractively priced and strategically well positioned.
MILLER: Whatever the motive, some say it sends an important signal.
AWAD: I think if you are a young person, you think like Warren Buffett and you invest for a 10, 20, 30-year period. And this sends a message that probably the best brains in the country are optimistic about our future and you should be too.
MILLER: Today's deal is the largest ever for Berkshire Hathaway, but already Wall Street is speculating about Buffett's next move. One analyst thinks it will be in health care, a play on the nation's aging population. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
One on One with Burlington Northern CEO, Matthew Rose
SUSIE GHARIB: A short while ago I talked by phone with Burlington Northern CEO Matthew Rose. I began by asking him why he did the deal with Warren Buffett.
MATTHEW ROSE, CHAIRMAN, BURLINGTON NORTHERN SANTA FE (BY TELEPHONE): Well as you know, Warren has been a shareholder in our company for, since 2007. And we've gotten to know each other. And when he presented the offer, we felt like it was compelling value to our shareholders.
GHARIB: What are the advantages of being part of Berkshire Hathaway as opposed to Burlington Northern going it alone?
ROSE: In many regards, there won't be a lot of change because we have a very long-term focus, because all of our assets when we buy something, they're 20, 30, 40-year assets. It's the association with a larger conglomerate, great balance sheet like Berkshire has. And that will be helpful, but not necessary. And I think it really just comes down to that our long-term vision and the way he runs his companies, there's a tremendous amount of similarity there.
GHARIB: Matthew, do you think that with this new corporate structure for Burlington Northern that you will be freer and more aggressive about pricing and about taking market share from your competitors?
ROSE: Well, certainly in a wholly owned subsidiary you won't be subject to the ebbs and flows of the capital markets, the equity markets and so we will see where all that takes us. Not committing to any of those things you mentioned. But it is a different structure, there's no doubt about it and I won't be meeting with shareholders on a quarterly basis and doing annual shareholder meetings and things like that. We'll be -- we'll have more time to focus on the railroad and getting more freight to the railroad.
GHARIB: With Warren Buffett buying Burlington Northern, it's a huge public endorsement of the railroad industry. Do you think this is the beginning of a railroad renaissance so to speak?
ROSE: Well Susie, if people have in some cases they've said that we've been in the railroad renaissance since the late 90s. You put the railroad industry in perspective and the 80s, the early 80s the railroad industry was in chaos. Bankruptcies, it really looks a lot like the airline business does today in many regards. I do believe that the industry is better positioned now for the future and if that classified as a renaissance, then I'm all for it.
GHARIB: As we know though, there's a lot of talk about Washington re- regulating the railroad industry. If that were to happen, how would that change the growth outlook for the rails?
ROSE: Within every industry you've got a plethora of customers and they all have different needs and while the Staggers Act that was put in in 1980 isn't perfect, it's generally done a great job for the industry and our customers.
GHARIB: There is always a lot of talk about Berkshire Hathaway and who is going to succeed after Warren Buffett is no longer running the company. You're the right age. Did you and Warren Buffett have any conversation about succession?
ROSE: No. I'm focused on BNSF.
GHARIB: Would you be interested in running Berkshire Hathaway if Warren Buffett asked you?
ROSE: Did I mention I'm focused on BNSF?
GHARIB: OK, we'll leave it there. Congratulations on the deal. Thank you so much.
ROSE: Thank you. Have a great day.
Thomas Russo of Gardner Russo & Gardner Analyzes Berkshire/Burlington Deal
SUSIE GHARIB: For more analysis now on why Warren Buffett did the deal, Thomas Russo joins us. Berkshire Hathaway is a top holding in his investment firm, Gardner Russo and Gardner. Hi Tom.
THOMAS RUSSO, PARTNER, GARDNER RUSSO & GARDNER: Hello Susie. Your last question led me to think that that would be a expensive way to conduct an executive recruiting, to hire Mr. Rose for $40 billion. I think there's a lot more to it than that. But go on.
GHARIB: But do you think that he could be one of the, in the running for that CEO job when Warren Buffett does move on?
RUSSO: I think the most important aspect, leadership is important, he's evidenced that. There are other people at Berkshire that evidence great leadership. The most important test I think within Berkshire is how well will the business unit allocate capital? This deal is a fair price, for a very sharply improving business and will probably continue to improve over time. But the real difference between being a major shareholder of a public company and being Berkshire Hathaway wholly owned subsidiary is they will be able to reinvest in an optimal way. It may be that Mr. Rose will spend a lot more money up front, even at the cost of current earnings to build a more secure competitive advantage going forward. But he won't have to worry about Wall Street criticizing him if he pays a much more aggressive stance on capital spending and building up the network.
GHARIB: Let me ask you something else. In terms of Warren Buffett's philosophy about buying companies and how Burlington Northern fits in. Buffett has always said that he's looking for brand names and for businesses that are predictable. Does Burlington Northern fit into that description?
RUSSO: Absolutely, brand name not so important. But the brands are important because they represent a product which people can't do without. And the brand loyalty is a lack of an ability to have an adequate substitute. If you had the only rail into a major market hauling coal from a region or bringing cars, maybe even electric cars from China, if Berkshire's lucky enough, bringing those across the country to the market, if you're the only line or the major competitive line in the marketplace, that's even more powerful than a brand. It's about the sort of market presence that they pick up with Burlington.
GHARIB: The other big announcement today from Warren Buffett is that he's doing a big stock split on Berkshire B shares, a 50 to one. Now we know that Buffett has never been in favor of stock splits. What do you make of the announcement?
RUSSO: I think that there's a discussion sometime ago, maybe at the annual meeting, that Berkshire shares may have been suffering from the same promotional activity that happened years back before they did the B shares, whereby people are bundling together some of the shares and offering smaller pieces out to smaller investors. I think that is an affront to Mr. Buffett. I think he'd like to have the shares be affordable to people and he certainly doesn't want any intermediaries running interference for him. So I think it may respond to that. The desire to get the shares held broadly by people who can now better afford to be a part of this important investment vehicle.
GHARIB: All right. Well we're going to have to leave it there, Tom. Thank you very much for coming on the program.
RUSSO: Thank you.
GHARIB: We've been speaking with Thomas Russo, partner of Gardner, Russo and Gardner.
The Federal Reserve Prepares to Make a Statement
PAUL KANGAS: One down, one to go. The Federal Reserve's key policy committee today finished up the first day of a two-day meeting on the economy and interest rates. The big question now is what will the Fed say in the policy statement it releases tomorrow? Darren Gersh reports on what to expect and what not to expect.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: At roughly 400 words, the statement of the Federal Reserve's interest rate setting committee is one of the most closely read documents in the world. But anyone looking there for major changes in wording or big hints about the future is likely to be disappointed this week. Former Fed Vice Chair Alice Rivlin is expecting only minor tweaks in the statement, beginning with a nod to reports the economy is growing again.
ALICE RIVLIN, FORMER VICE CHAIR, FEDERAL RESERVE: That's good, but other things are not so good. Consumer confidence isn't so great. Consumption hasn't been holding up quite as well as they hoped it would, so they will convey in the first paragraph a slightly changed, mixed message, because the economy is sending mixed messages.
GERSH: With unemployment high and factories operating at low levels, economists expect the Fed will see no signs market pressure is driving up inflation. And with the stimulus spending peaking, there is reason to worry the economy could falter yet again. Add up the uncertainty and economist Mark Calabria expects the Fed won't shift course tomorrow.
MARK CALABRIA, DIR. FINANCIAL REGULATION STUDIES, CATO INSTITUTE: I do think there is going to be a reluctance on their part to really try to signal, because they don't want to panic the markets right now. And we really are near an inflexion point. And it's hard to say, nobody has got a crystal ball. Are things going to get weaker or are things going to get better? I think they want to leave themselves room to go either way.
GERSH: Rivlin agrees, saying there is too much time spent looking for hidden meanings in Fed statements.
RIVLIN: They are carefully crafted, but there are a lot of people employed in what seems to me rather busy work -- guessing what the Fed means and what it will do next. The notion that the Fed doesn't know what it is going to do next and doesn't have it all planned out seems to be hard for Wall Street people to grasp.
GERSH: Rivlin adds the Fed is unlikely to change course and raise interest rates substantially before the employment outlook has clearly turned. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Of Mutual Interest"-Bruce Berkowitz, Portfolio Manager for Fairholme Fund
PAUL KANGAS: Many experts say long-term performance is the most important factor in choosing a mutual fund. So in tonight's "Of Mutual Interest" segment, a fund that by most measures is number one in its category. It's the Fairholme Fund. This large cap value fund celebrates its tenth anniversary next month. Over that time, it has seen an annual return of 12.5 percent versus a 1.6 percent loss in the Standard & Poor's 500 Index. Bruce Berkowitz has managed Fairholme since its inception and he joins us now. And Bruce, welcome to NIGHTLY BUSINESS REPORT.
BRUCE BERKOWITZ, PORTFOLIO MANAGER, FAIRHOLME FUND: Thank you, Paul.
KANGAS: What is the secret to your decade of success?
BERKOWITZ: Well, Fairholme Fund, our trademark is we ignore the crowd. So we pay attention to what matters and what matters is cash. We count cash, ignore the crowd. Try and kill our most cherished ideas and we put our shareholders first, that's what it all about.
KANGAS: Almost 40 percent of your fund is just in five stocks, namely Pfizer, Sears Holdings, St. Joe, AmeriCredit and Forest Laboratories. Why so much faith in these companies?
BERKOWITZ: Well Fairholme Fund is a focused fund and we came to the conclusion that why put money in your 40th best idea if you could put more money in your first, second and third best idea. And of course with Obama care and the scare that's going on with our health care companies and pharmaceutical companies, all their market prices went over the proverbial cliff, which gave us a chance to buy cheap.
KANGAS: You also have a large position, happily, in Berkshire Hathaway which did very well today. Are you happy with today's deal and the acquisition of Burlington Northern?
BERKOWITZ: Great acquisition for Warren Buffett and Berkshire Hathaway, great fit with his insurance operations, the volatility in the insurance versus the stability of the railroad. Big acquisition, gets to put a lot of cash to work and he could put more and more cash over time as the economy grows and there's a switch towards the rails versus trucking.
KANGAS: Although 40 percent of your fund is invested in health care stocks, this sector hadn't been among the leaders this year and that's hurt your short-term performance. Are you still bullish on health care?
BERKOWITZ: Well, people are worried about a new health care policy and what the government is going to do. But at the end of the day our companies and health insurance are going to be the businesses that take the country forward with universal health care. After all, if companies such as Humana or Wellpoint don't do it, who is going to do it?
KANGAS: Unlike most mutual fund managers, you keep a big part of Fairholme Fund in cash, at 17 percent cash now. Are you hedging your bets on the current market?
BERKOWITZ: Since of the start of the Fairholme Fund, we've always had a double digit cash percentage and for us cash is a, you could call it financial valium. It gives us the wherewithal to take focused positions and of course when no one else has cash, cash becomes very valuable.
KANGAS: Bruce, do you personally own any of the stock issues we've discussed here?
BERKOWITZ: I own directly or indirectly every position that I discussion, every position that the shareholders of the fund own. After all, why would I possibly recommend certain positions to our shareholders if I'm not willing to put my own money and my family's money in?
KANGAS: OK. That makes good sense to me and faith in your own judgment, right?
BERKOWITZ: Absolutely.
KANGAS: OK. Bruce, thanks very much.
BERKOWITZ: My pleasure.
KANGAS: My guest, Bruce Berkowitz of the Fairholme Fund.
Paul Kangas' Stocks in the News
PAUL KANGAS: The transport stocks were about the only thing moving higher on Wall Street this morning thanks to that Burlington Northern acquisition. Selling in the blue chips came in the face of a better than expected .9 rise in September factory orders. It appears investors were hesitant to make moves ahead of tomorrow's Fed policy decision. After being down as much as 70 points though, the Dow partially recovered on news of a rebound in auto sales in October. We'll have more on those sales in a moment. So the Dow closed off only 17.53 points at 9771.91. The NASDAQ Composite actually gained 8.12 to 2057.32, while the Standard & Poor's 500 Index was up 2.53 ending at 1045.41. In the bond market, the 10-year note fell 12/32 to 101 9/32, putting the yield at 3.47 percent.
Big board volume leader on 77 1/2 million shares, Citigroup (C) moving up $0.05 a share.
Followed by Ford Motor Co (F) down $0.14.
Bank of America (BAC) up $0.17.
Schering-Plough (SGP) was down $0.25. The company today completed its merger into Merck.
And Merck (MRK) itself down $0.59 a share.
General Electric (GE) dropped $0.15.
Pfizer (PFE) a $0.06 loss.
But there you see it, Burlington Northern (BNI) up $20.93 on that $100 a share buyout bid from Berkshire Hathaway. Sixty percent of the bid will be in cash and 40 percent in Berkshire stock.
And then let's have a look at some of the other big rail stocks moving higher today. CSX (CSX), Kansas City Southern (KSU), Norfolk Southern (NSC), Union Pacific (UNP), all significant gains.
Moving along in the actives, Motorola (MOT) up a nickel a share.
And then Ferro (FOE), tenth in volume, down $0.36. The company priced 34 3/4 million of its shares offered at $5.60. That was the price.
Berkshire (BKB.B) up $60.35, not only to the reaction to the Burlington Northern acquisition, but as you heard, to the 50 to one stock split. That will bring the stock down to around the mid-60s, $65, $66 after the 50 for one split, hard to say it, hard to even think it. And the Berkshire A stock today incidentally closed at $100,450. That was up $1,700.
Mastercard (MA) down $3.45. Third quarter earnings, $3.45, up from a loss last year. The Street estimate was only for $2.94 but the company sees revenue growth in the next two years to be shy of Wall Street estimates and that sent the stock down.
Archer-Daniels (ADM) up $1.39 despite sharper lower first quarter earnings, $0.77, down from last year's $1.62, but that was $0.20 above the Street estimate.
Kraft Foods (KFT) down a dime in regular way trading. After the close, the company came out with third quarter earnings, $0.55, down from $0.91 and in after hours trading, the stock fell nearly $1 from that price.
Energizer (ENR), the battery company, down $6.08. Fourth quarter earnings fell to $0.53 from $1.67 last year and sales were down about 4 percent.
On the upside, Landry's Restaurants (LNY) gaining $2.93. The chairman and CEO Tilman Fertitta is making a sweetened $14.75 per share buyout bid.
And then Stanley Works (SWK) up $4.54, a positive reaction to its acquisition of Black and Decker in an all-stock deal. That's worth about $60 a share for Black and Decker and that stock closed at $62, up $14.86 today.
NASDAQ's most active, Apple (AAPL) down $0.56.
Followed by Intel (INTC) $0.51 loss.
Research in Motion (RIMM) rebounding from yesterday's loss, $3.87, positive comments from National Bank Financial and the analyst there said if the stock goes a whole lot lower, it becomes more susceptible to a takeover.
Microsoft (MSFT) $0.35 loss.
And then Google (GOOG) up $3.30.
Amazon.com (AMZN) lost $0.47.
Cisco Systems (CSCO) a $0.09 drop.
Human Genome (HGSI) up another $2.79 after jumping over $6.50 yesterday on its promising treatment for lupus.
Qualcomm (QCOM) up $0.41.
And Baidu (BIDU) gained $7.59.
In other NASDAQ trading, Diedrich Coffee (DDRX) ground out a gain of $5.47. Peet Coffee and Tea Company will acquire Diedrich for $26 a share.
Those are the stocks in the news tonight.
