Operating like Berkshire Hathaway: Alleghany Corporation

While most eyes have been on Berkshire Hathaway ($BRKA), ($BRKB) lately and rightly so. Their are other companies that operate in a similar fashion to Berkshire one being Alleghany Corp. ($Y) . Alleghany is one of those companies that fly under the radar. Alleghany is an insurance company that takes the "float" (which is money that doesn't belong to the company, but are premiums taken in from policy holders and paid out to policy holders). Alleghany's principal business is insurance, however with the access to this float (or cash) they reinvest the money in other businesses, much like Berkshire does. Alleghany has over 60 publicly traded company's amongst its investment portfolio.

"Alleghany's objective is to create stockholder value through the ownership and management of a small group of operating businesses and investments, anchored by a core position in property and casualty insurance. Alleghany is managed by a select company staff which seeks out attractive investment opportunities, delegates responsibilities to competent and motivated managers, defines risk parameters, sets management goals for its operating businesses, ensures that managers are provided with incentives to meet these goals, and monitors their progress.

The operating businesses function in an entrepreneurial climate as quasi-autonomous enterprises.

Conservatism dominates Alleghany's management philosophy. Alleghany's philosophy shuns investment fads and fashions in favor of acquiring relatively few interests in basic financial and industrial enterprises that offer the potential to deliver long-term value to the investor."

An interesting fact is that these guys at Alleghany were in Burlington Northern Santa Fe long before Buffett & Co. They have since divested their shares in Burlington and now hold over $825 million in cash in which they can use for future investments. Also they have NO debt and have managed to weather the last couple years quite well. They like Buffett use book value as their yard stick and not the actual price of the stock. The stock ($Y) trades at a discount to its current book value of $306.71.

We shun investment fads and fashions in favor of acquiring relatively few interests in basic financial and industrial enterprises that offer the potential to deliver long—term value to the investor... Alleghany Corporation

Author currently long $Y

The Great Iron Horse Burlington Northern's New Engineer: Warren Buffett

Buffett gave us subtle hints almost 3 years ago when he stated he wanted to "bag an elephant", who new the elephant was a "Iron Horse" (a pseudonym for steam engine). Buffett has said in the past he was looking for a large deal, something that would move the needle- the needle being Berkshires enormous stock portfolio. Well Warren Buffett just bought Burlington Northern Santa Fe, that is the whole company. BNSF will now be under the Berkshire Hathaway umbrella with companies such as Geico, Dairy Queen, See's Candies, and Shaw Carpets (see the whole list here). This is by far the largest deal Buffett has ever done which totals a whopping 44 billion. Before this, Berkshire's biggest acquisition was the $16 billion stock purchase of reinsurance giant General Re, announced in 1998. Buffett, who has been building up his rail holdings for several years was in the headlines back in early 2007 when it was announced that he had taken positions in several of the major rail carriers. But why did he zero in on Burlington Northern. Here are some of the pieces to the puzzle: 1) it's a business (railroads) that easy to understand 2) it's has a high return on equity which is currently 15% for the trailing 12 months (last year it was 19%) 3) it's a business with a moat (has high barrier to entry) not just anyone can start a railroad company 4) it's had consistent earnings 5) it's very efficient way of moving goods 6) it's a play on coal and other commodities 7) it's throwing off lots of free cash flow 8) it has high-quality management (its track record speaks for itself) Many people wondered why he had suddenly fallen in love with the sector. The simple answer is globalisation. With booming demand for commodities from the Far East and a hunger for cheap foreign goods in the West, the rail companies linking consumer and producer look appealing for the long haul. Buffett has said he realized a few years late that railroads were an appealing investment. As diesel prices rise, shipping by rail instead of truck becomes more attractive, and it would be extremely difficult for a competitor to build a new railroad. Continuing upward pressure of fuel costs make rail transport increasingly more competitive with the trucking fleet and shall prompt more wholesale purchasing within our own continent. The dominant trend is the demand for raw materials and machinery to fuel the construction booms in China and India. US rail firms transport grains and building and construction products for export; US exports to China. "I basically believe this country will prosper and more people will be moving more goods 10, 20, 30 years from now and the rails will benefit," Buffett told CNBC. It's also a bet on the future of another country -- China. China craves the coal and other raw materials that the U.S. produces. Those commodities fuel the great economic engine that is China, which is the factory to the world. U.S. coal and goods are shipped via rail to Pacific ports and then shipped to China. With his round-out purchase of Burlington Northern, Buffett thinks China will continue to be strong. * Author is currently long BNI

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$NYT, Railroads, And Lumberjacks?

Thursday's Links...

Which offers a better value? its stock price or its product: The New York Times news paper

Jim Cramer started as a news reporter, turned Hedge Fund Guy, turnedT.V. personality now working on the railroads?

During the Hard Times of the 1930's, Lumberjacks fared well working in an industry that had a 120% return.