BRK.A

Question: Why Buffet Is The Wizard of Omaha? Answer: (NYSE:BNI) Analysis of Berkshire Hathaway's (NYSE:BRK.A) acquisition of Burlington Northern Santa Fe Corporation (NYSE:BNI) Value Expectations is often critical of silly corporate acquisitions, where bidders overpay to add growth or strategic opportunities. While those terms sound nice, the bottom line is that firms need to be able to justify the value of said growth or strategic opportunities with future cash flows. More often than not, firms bank on unreasonable growth or profit expectations to justify a deal. For recent examples, see our analysis of Kraft/Cadbury or Dell/Perot:

The Oracle of Omaha Warren Buffett is generally viewed as the most respected and successful investor in history, and many of our value-oriented readers follow the movements and purchases of Buffett rather closely and for good reason. Berkshire Hathaway, a conglomerate holding company, which Buffett built from a textile company into a major corporation, has averaged a 20.3% compounded annual gain in per-share book value from 1965-2008. There is no doubt about the success Buffett has achieved over the years, and there has even been a recent study done that shows an investor could have earned over 14% returns a year had they purchased each Buffett stock, a month after his investment company disclosed ownership.

We thought it would be an interesting story to show how Buffett’s holdings would rank according to The Applied Finance Group’s (AFG’s) valuation model and Economic Margin Methodology. The companies we believe look the most attractive and that investors should pay the most attention to when searching for long investment opportunities are the companies that have both an attractive default AFG valuation and are expected to improve their Economic Margins at a greater rate than their sector peers.

AFG's track record of identifying winners and losers has proven that companies AFG identifies as undervalued are more likely to outperform, than those AFG ranks as overvalued, and the same holds true for companies with expected improvements in EMs vs. expected declines. The Economic Margin methodology adjusts for common distortions in GAAP accounting practices and helps investors to understand the true economic profitability a company earns above its cost of capital. By understanding the true economic profitability a company earns and by gaining a firm grasp on the expectations embedded in security prices, investors can come to a more refined intrinsic value for a company and thus put themselves in a better position to outperform.

Below is a list of Berkshire Hathaway’s current holdings (excluding Financials) ranked by valuation attractiveness, and followed by expected change in economic margins.

Rank within Sector Ticker Name Sector Valuation Signal EM Change Signal Berkshire Hathaway's Holdings (ex. Financials) (NYSE:SNY) SANOFI-AVENTIS ADS Health Attractive Positive (NYSE:WMT) WAL-MART STORES INC Consumer Services Attractive Positive (NYSE:UNP) UNION PACIFIC CORP Transportation Attractive Positive (NYSE:BNI)  BURLINGTON NTH SANTA FE Transportation Attractive Positive (NYSE:GSK) GLAXOSMITHKLINE PLC Health Attractive Positive (NYSE:BDX)  BECTON, DICKINSON & CO Health Attractive Positive (NYSE:NLC) NALCO HOLDING CO Basic Material Attractive Positive (NYSE:NRG)  NRG ENERGY INC Utilities Attractive Negative (NYSE:COP)  CONOCOPHILLIPS Energy and Extraction Attractive Negative (NYSE:NSC) NORFOLK SOUTHERN CORP Transportation Attractive Negative (NYSE:JNJ) JOHNSON & JOHNSON Health Attractive Negative (NYSE:PG) PROCTER & GAMBLE CO THE Consumer Non Durable Attractive Negative (NYSE:LOW)  LOWE'S COMPANIES INC Consumer Services Attractive Negative (NYSE:KFT) KRAFT FOODS INC CL A Consumer Non Durable Fairly Valued Positive (NYSE:KO) COCA-COLA CO Consumer Non Durable Fairly Valued Negative (NASDAQ:COST) COSTCO WHOLESALE CORP Consumer Services Fairly Valued Negative (NYSE:HD)  HOME DEPOT INC Consumer Services Fairly Valued Negative (NYSE:NKE)  NIKE INC CL B Consumer Non Durable Fairly Valued Negative (NYSE:CEG) CONSTELLATION ENERGY GRP Utilities Unattractive Positive (NYSE:WPO)  WASHINGTON POST CO Consumer Services Unattractive Positive (NYSE:IRM) IRON MOUNTAIN INC Consumer Services Unattractive Positive (NYSE:USG)  USG CORP Capital Goods Unattractive Positive (NYSE:KMX)  CARMAX INC Consumer Services Unattractive Positive (NYSE:GE) GENERAL ELECTRIC CO Capital Goods Unattractive Negative (NYSE:UPS)  UNITED PARCEL SERVICE B Transportation Unattractive Negative (NYSE:ETN)  EATON CORP Capital Goods Unattractive Negative (NYSE:IR) INGERSOLL-RAND PLC Capital Goods Unattractive Negative (NYSE:IR) WABCO HOLDINGS INC Consumer Durable Unattractive Negative (NYSE:GCI) GANNETT CO INC Consumer Services Unattractive Negative

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