Buffett admits railroad 'not a bargain'

He says Berkshire's purchase of Burlington Northern Santa Fe will make sense in the long run.

By Kim Peterson Nov 16, 2009 2:58PM
Warren Buffett is investing with the next 100 years in mind.

So in the short term, Berkshire Hathaway's (BRK.A) purchase of railroad company Burlington Northern Santa Fe (BNI) is "not a bargain," Buffett said.

But over the next 100 years, the railroad's results will justify the $26 billion price tag, he said in an interview with Charlie Rose, which was reported by Bloomberg.

"It's a good asset for Berkshire to own over the next century," Buffett told Rose. "You don't get bargains on things like that. It's not cheap."

The railroad purchase is the biggest takeover Buffett has ever made, and it's a gamble. He needs to borrow $8 billion to make the deal, Bloomberg reports, and is risking the stellar AAA credit rating that Berkshire has enjoyed.

The way Buffett describes it, the railroad appealed to him because he wanted to buy something intrinsically American, something that was so reliant upon and reflective of the U.S. economy that it would rise and fall with America.

Berkshire is paying 18.2 times Burlington's estimated 2010 earnings. That's quite high, but few people seem to criticize Buffett's wisdom. They would rather give him the benefit of the doubt for a while.

"The company wasn't egregiously cheap," said a manager at a hedge fund that owns Berkshire shares. "It could be five years before the logic" of the Burlington Northern purchase becomes clear.


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