Compounding Machines

Archive for December 2009

Union Street Railway

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Below you will find another case study from the Buffett with “more ideas than money” years. Thanks go out to a regular reader for sending me the Moody’s sheet.

During a question and answer session with University of Kansas students in 2005, one student asked what he would do differently given his belief that “it’s a huge structural advantage not to have a lot of money.” Buffett went on to say that with small capital he would look for “little anomalies, companies that are off the map – way off the map.” An example given was Union Street Railway of New Bedford, Massachusetts that was “selling at $30 when $100 is sitting in cash.”

You will see below page 1492 of the 1954 Moody’s Transportation Manual. At the time of this publication Buffett was three years removed from graduating from Columbia and was working for his father’s brokerage firm in Omaha. I believe it was around this time when he came across Union Street, an example he frequently provides students of a small, obscure cheap cigar butt-type investment.

Union Street operated a bus service near New Bedford, an area containing about 120,000 people. The company owned 113 buses in total (more about these in Alice Schroeder’s book). Union Street was a business in decline as evidenced by the drop in revenue passengers from 27 million in 1946 to 13.9 million in 1953, to the point where the business was operating in the red. Looking to the balance sheet you would see why an enterprising Graham-Dodd investor would be interested. You will see listed in current assets, cash and U.S. government securities totaling $969,363, or $52.79 per share. As Buffett mentioned the stock was selling around $30 per share, or $32 to $38.50 in 1953. If you look in non-current assets you will see two line items labeled “Special Deposits” and “Accid. Ins. Trust” which were $386,376 and $600,000 respectively, or $53.72 per share. Adding it all up, you had $106.50 per share in cash and cash-type items. The company had no debt to speak of. There were 18,363 shares out, so at $30 per share the market cap was $550,890, which is roughly $3.7 million in today’s dollars.

Incidentally, you may notice one of Union Street’s directors listed is Seabury Stanton. Stanton was running another New Bedford-based company at the time named Berkshire Hathaway. Like Ken Lewis unknowingly saved the U.S. economy, Stanton unknowingly saved Berkshire. As the story goes, Buffett, whom owned roughly 10% of the outstanding shares, came to an agreement with Stanton to tender all of his Berkshire shares to the company at $11.50. The following week, Stanton sent a letter indicating a tender for his stock at $11.375 per share. This low-ball offer angered Buffett leading him to continue buying up more Berkshire shares, eventually gaining control of the company. If Stanton would simply have tendered Buffett’s stock at the agreed upon price, we likely would never have heard of Berkshire Hathaway.

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Written by sdinvest

December 24, 2009 at 6:21 am