Berkshire Hathaway - Break it up? - Size is the anchor of performance

[ValueMaven]

I forgot where but I heard other railroad companies have been more efficient than BNSF.  Maybe there's some mismanagement or complacency within BRK?

No.  Other railroads have used Precision Scheduled Railroading, which basically limits the # of trains to very specific times and is not flexable for customers.  It improves operating margins by 300-400bps for several reasons - but makes customers unhappy.  Buffett has said that BNSF is gaining customers b/c BNSF does not use PSR currently. 

[thepupil]

Ultimately I think PSR risks breaking the bond between regulators and the monopolies / oligopolies that are the railroads. Buffett won't say it as directly, but that's pretty much the gist of BNSF/Berkshire's view on PSR. Why mess up a cozy high ROE business for more earnings, particularly as the US swings more democrat?

Rose: Absolutely. It’s not. Let me tell you why. If you go back to the 1980s, you saw where some railroads had a singular focus on operating ratio. And the easiest way to reduce operating ratio is to take out track and reduce maintenance expenses. That’s really not the covenant, if you will, we have with our regulator, the STB, and even public policy makers. The Staggers Act wasn’t, “Railroads, haul only what you want to haul on your network.” It’s “Haul everything, and you have the ability and the flexibility to differentially price on your network.” That’s the deal, and it’s in the public’s best interest to move more tons to the railroad network, not to move tons off the railroad network.

.” Warren talks about this in his annual letter. He says that we make these investments with the belief that the future regulator—not the regulator who’s there today, the regulator who’s there tomorrow—will take all this into account. I simply call it the unwritten commitment. That is, we spend enormous amounts of capital on these networks, and we get a regulator who allows us to provide good returns. All that’s worked, I think, pretty well.

https://www.railwayage.com/news/matt-rose-less-is-not-better/

[MarioP]

I stand corrected.

Can I at least get a rerating by the market on the separate entities?
I mean seriously, you couldn’t build either BNSF or BHE for barely over book.

That is what I said at the begining : traders would have a short term profit, decades holder will loose. Ask yourself which one Warren wants to be happy and you know what he will do.

[thepupil]

one thing I've wondered is whether or not Berkshire would be helped or hurt from a regulatory standpoint if BNSF / BE floated 10% public stakes, which would put a market value on them.

the conventional wisdom would be that a 10% float stock would trade at a discount to peers, though I'm not sure that's the case as the float would be big enough to attract a liquid diversified but high quality shareholder base (10% of BNSF would be a $12-$16B company), you could probably build a decent shareholder register quite easily, and the governance concerns with a minority stub, in my view would be mitigated by the berkshire brand / very understandable capital allocation policies (BNSF distributes cash as it can, BE retains earnigns)

would the market look on Berkshire differently if instead of owning these 2 businesses privately (worth about $200B in my view: UNP + 2x book for BE = $200B, $150B if you're feeling conservative and value-y) Berkshire owned 90% of them and 10% floated freely. they are already SEC filers with independent capital raising ability.

tax consolidation would still exist above 80% ownership IIRC.

would Berkshire as a business benefit from this?

[kab60]

I definately see your point, and it might get a higher mark that way, but I'm not sure public investors would care much for a Utility Company that doesn't pay dividends, and it would make it harder to shift capital allocation quickly (say BNSF saw an interesting expansion opportunity and wanted to retain all capital one year - not that it's very likely). Mostly though, I think it would require additional management focus and possibly public scrutiny. Don't see it happening under Warren, maybe later.

[villainx]

Thank you for the PSR feedback!

[DooDiligence]

I definately see your point, and it might get a higher mark that way, but I'm not sure public investors would care much for a Utility Company that doesn't pay dividends, and it would make it harder to shift capital allocation quickly (say BNSF saw an interesting expansion opportunity and wanted to retain all capital one year - not that it's very likely). Mostly though, I think it would require additional management focus and possibly public scrutiny. Don't see it happening under Warren, maybe later.

Tracking stock, ala Malone?
Doesn't really fit the profile & I'm largely ignorant of such issues.

[RVP]

In a world of abundant capital and VCs willing to tolerate years and years of losses, I think having everything under one roof is not only a big advantage, but increasingly a necessity.

Yes spinning off divisions can allow you to be more focused & efficient, but in an upside down world where growth is all that matters and near/mid-term profitability is an after-thought, you need a very big bank account to endure/adapt to the uneconomic competition and disruption. A lot of Berkshire's non-monopolistic/ non-regulated subsidiaries may be mortally wounded going it alone.

[bizaro86]

I forgot where but I heard other railroad companies have been more efficient than BNSF.  Maybe there's some mismanagement or complacency within BRK?

No.  Other railroads have used Precision Scheduled Railroading, which basically limits the # of trains to very specific times and is not flexable for customers.  It improves operating margins by 300-400bps for several reasons - but makes customers unhappy.  Buffett has said that BNSF is gaining customers b/c BNSF does not use PSR currently.

It seems reasonable to me (as an admitted outsider) that trains would run on a schedule. That's how most transportation (planes, busses, etc) works. Even pipeline deliveries are scheduled (batch lines) and they have continuous flow.

I agree that customers prefer extra flexibility, but there doesn't seem to be a lot of evidence that they're willing to pay for it.

And if the regulatory system changes it will likely change for all the Class 1 railroads at the same time. So BRK could conceivably get none of the margin benefits of PSR and all the regulatory downside.

[kab60]

I definately see your point, and it might get a higher mark that way, but I'm not sure public investors would care much for a Utility Company that doesn't pay dividends, and it would make it harder to shift capital allocation quickly (say BNSF saw an interesting expansion opportunity and wanted to retain all capital one year - not that it's very likely). Mostly though, I think it would require additional management focus and possibly public scrutiny. Don't see it happening under Warren, maybe later.

Tracking stock, ala Malone?
Doesn't really fit the profile & I'm largely ignorant of such issues.

Yeah, there are definately lots of ways to surface value here, but he's not really playing that game, and I prefer it that way. Either way I think massive buybacks, even at fair value, is the way forward. The old man can't really defend hording more cash, and it's difficult if not impossible for him to find better risk/reward elsewhere.