These include consumer industrial and agricultural products Now we look at this

These include consumer industrial and agricultural

This preview shows page 108 - 111 out of 263 pages.

its rails. These include consumer, industrial, and agricultural products.) Now we look at this web page (see top chart)—the ten-year summary of financial statements. Sales were flat for several years but have been accelerating consistently at 14 percent over the last five years. I had to use the calculator on my website for that one. EPS was also flat and then shot up. The long-term rate of growth is 11 percent, but over the last five years the growth rate is 24 percent. I had to use the calculator on my website for that one, too. Let’s switch the page to Cash Flow and get the last five years. Do the calculation. Remember the first year is the zero year. Cash is growing at 11 percent per year and consistent. (I got that number using the Cash Flow Growth Rate calculator you can access free at my website; it’s easier to use the calculator than the Rule of 72 when the numbers don’t double.)
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One final thing to check is Debt. Go to the balance sheet and take a look (see top chart). You can see the most recent Debt figure from the Interim Balance Sheet: $9,099 million. Can they pay that off in three years of net earnings?
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Let’s see: Look at the bottom line of the Annual Income Statement. These numbers are quarterly income, so add up the last 4 quarters: Net Income (aka earnings) is $2,115 million in 2008. Divide the Debt by the 2008 Net Income: $9,099 / $2,115 = 4.3. That’s the number of years it will take for BNI to pay off its debt out of Net Income. We want it to be three years or less, so Debt is a red flag. If you stockpile this one, you’d better know why they’re carrying so much debt. Answer: “To help ensure we have the capacity to meet current and future freight transportation needs” (from the Annual Report). In other words, they’re borrowing to get ready for the demand for rail freight to skyrocket. If you believe in the business plan, if you think the Debt load is a good idea, then you’re going to give BNI a pass on Debt, and you’re going to keep digging to see what other red flags you turn up. If you don’t think it’s a good idea, no free pass, and you don’t buy this business. Let’s summarize: ROIC is low due to investment costs and ROE is high. Red flag. BVPS Growth Rate is consistent and 8 percent. Below the 10 percent minimum. Red flag. Sales Growth Rate is recently consistent and 14 percent. Excellent. EPS Growth Rate is recently consistent and 24 percent. Excellent. Cash Growth Rate is consistent and 11 percent. Good. Debt is payable in four years from earnings. Bad but maybe for a reason. On first glance the Big Five plus Debt look mixed. Excellent growth of sales and earnings with solid consistency in cash and equity. And debt is steady, if high. This is not a bad-looking stock and it has two huge things going for it: It has a huge, unchallengeable Moat and it’s got a great story for the future.
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