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Published: October 16, 2009
"Stupid."
That's what Buffett's right-hand man Charlie Munger had to say
about not investing in railroads sooner.
That was two years ago. Berkshire Hathaway (NYSE: BRK-B)
now has a stake in three of the four major railroads in the
United States. But he is so fond of one, he owns about 20% of
the company.
Luckily, it's not too late for investors to jump on board with
Buffett. The railroad is still trading at about the same price
as when the Oracle of Omaha first bought the shares.
More importantly, everything Buffett loves about this investment
is still intact. He even bought an additional 4.3 million shares
earlier this year. And it's not that Buffett is bullish on
everything right now, he has been cutting his stake in other
holdings, like Moody's (NYSE: MCO).
There are only three other major railroads in the U.S.;
Burlington Northern (NYSE: BNI) and Union Pacific
(NYSE: UNP) operate in the West and
Midwest, while CSX (NYSE: CSX) and Norfolk Southern
(NYSE: NSC) operate in the East.
Don't expect new competitors to
enter the mix anytime soon. It's
extremely expensive to build new
tracks, to say nothing of navigating
past the many regulatory obstacles.
This gives the industry a wide
economic moat to protect its
profits, something Buffett demands
of his investments.
Rail also has an advantage over
other forms of land transportation.
Rail is less expensive than trucks
over long distances -- three times
more fuel-efficient per ton shipped.
The long-term future for rail is
bright, the U.S. Department of
Transportation projects that demand
for rail will increase nearly +90%
by 2035.
But even with little competition,
the past year has been tough on the
railroads. The recession reduced
demand for many products. Less
demand meant fewer products were
produced and, thus, transported.
Out of the four major railroad
operators, one stands out for
navigating the downturn best. It
also happens to be the company
Buffett has a 20% stake in, it's
Burlington Northern (NYSE: BNI).
Burlington is the second-largest
railroad, with more than 32,000
miles of track in 28 states.
Here's how Burlington stacks up
against its competitors.
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The +15% jump in net income is impressive amid tough economic
conditions. One of the reasons for Burlington's success is its
ability to cut expenses better than any of its rivals. It
managed to cut operating expenses by a staggering -33%.
Burlington is also fortunate to have major railroads in a region
known as the Powder River Basin. Coal production is less
cyclical than most businesses since it's used to generate more
than half of the electricity in this country, which helped
shield 30% of Burlington's revenue that stems from coal
transportation. Coal revenues were down -3% in the second
quarter from the year-ago period, compared with -34% for
consumer products.
Burlington is also in good position to benefit from trade with
China. Imports and exports usually enter or leave through
California. Most of the trades between the two countries ends up
on a BNI or UNP train because their network of rails are
concentrated in the West. From 2003 to 2008 trade between China
and the United States more than doubled.
Business is starting to pick up for the rails. The Association
of American Railroads reported Wednesday that average weekly
container units in September were the highest since November of
last year. This is a great indication that things are getting
better for the industry.
Burlington's shares are up almost +5% on Wednesday's news. I
expect the shares to continue to move up as investors become
more confident in the economy and more good news trickles in
from the industry.
Here's a look at the 10-year total return of the four major
railroads.
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BNI has shown its resilience during the downturn and its
ability to outperform in the long-term. Investors who want to
invest alongside Buffett should consider adding shares of
Burlington now, while some uncertainty about the economic
recovery remains.
-- Francisco Bermea
Staff Writer
StreetAuthority |
