Warren Buffett has been a big influence in my development as investor.
Unlike typical Buffett copy-cat investors, I don't follow Buffett to find out
which stocks he's buying. For starters, large investors like him have to buy
large cap stocks just to move the needle on the performance of their portfolio.
With $50 billion to invest, his time is better spent searching for opportunities
in the $10 to $20 billion range (few and far between). So I tend to avoid buying
the stocks Buffett buys, as I believe that we have an advantage over him by our
ability to buy stakes in smaller companies.
I keep tabs on Buffett to see how he's thinking.
Many analysts and Buffett watchers have been asking why he's become bullish on
the railroad industry.
But that's the wrong question to ask. You see, Buffett didn't first become
bullish on the entire railroad industry.
He's become bullish on a single company, Burlington Northern. But this suggests
an underlying strength in the railroad industry as a whole that can mean great
profits for us.
Railroads have now begun to compete effectively with (and work with) the
trucking industry. After a long series of bankruptcies, mergers, and
acquisitions, there are now four significant US railroads.
They are:
The Union Pacific
The Burlington Northern Santa Fe
The CSX
The Norfolk Southern
The Union Pacific and BN Santa Fe dominate the West, while the CSX and Norfolk
Southern dominate the East. All of these companies have developed intermodal
capacities, with the ability to shift freight from railroad companies to trucks
to ships and barges.
Which means that companies like BNI are able to get higher returns for the same
capital investment. As you can see from the example below, BNI is expected to
have increased its Return- On- Capital by 67% during the past four years:
In 2007 BNI is expected to have received 67% more for every dollar it spent than
it did in 2004 (13.2% versus 7.9%). If the company is able to increase its ROIC
to 15% as is expected, that would have increased its earnings to $4.008 billion.
At the same price/earnings multiple that BNI carries today of 15, the stock
would automatically increase by 110% to $169.71 per share.
The Railroad Oil "Pipeline"?
For Buffett to be enticed by a company that was able to increase its ROIC by
44%, it stands to reason that the speculated future of both the railroad
industry in general, and BNI specifically, have likely persuaded him to make his
largest equity investment in years.
Due to the fact that BNI is well positioned on the west coast to take advantage
of the long-term trend in imports, especially those from Asia, there should be
strong demand for BNI's services for the foreseeable future.
After entering U.S. ports, many of these goods are then shipped by rail, as this
is typically cheaper than using trucks for long-haul routes.
But it's neither imports from Asia, housing starts nor car sales, all
traditional drivers of revenue growth among railroads that will propel BNI going
forward. The big driver of growth will likely be Ethanol.
President Bush's recent State of the Union address aside, the need for
alternative fuels - especially Ethanol - is real and here to stay. Additionally,
Ethanol fuel cannot be shipped in traditional pipelines because it picks up
corrosive water and other chemicals. Therefore, it must be shipped by other
methods, notably rail.
As Ethanol becomes more mainstream and widely used, there will be a substantial
increase in the demand for rail services from alternative fuel producers and
refiners.
And it is that, more than any other long-term driver that will likely portend a
generational shift in the economics of the rail industry.
Burlington Northern Santa Fe Railway "At A Glance"
BNSF Railway Company
2650 Lou Menk Drive
Fort Worth, TX 76131-2830
Phone # 1-800-795-2673
http://www.bnsf.com/
Description:
Burlington Northern Santa Fe Corporation, through its subsidiaries, provides
freight rail transportation services in North America. The company transports
various products and commodities, including consumer, industrial, coal, and
agricultural products.
The consumer products include automotives, as well as perishables and dry boxcar
products. Other consumer goods include: cotton, salt, rubber, and tires.
The transport services for industrial products include construction products and
building products.
Chemical, plastic, and petroleum products products are also transported. The
company also provides transport services for agricultural products.
