After BNI, what’s next for Buffett / BRK?

bigdog posted on 11/09/09 at 09:41 AM

What do you make of Warren Buffett’s $34 billion takeover of Burlington Northern (BNI) railroad, Berkshire Hathaway’s (BRK) biggest deal ever?

I know a lot of you cats are big transportation fans (if trading volumes of Dryships (DRYS) and other transport stocks are any indication), but school the rest of us. What’s the magic in railroads, anyway? I decided to do some homework…

WSJ’s Michael Corkery gives a great profile of BNI and its attractions in “Just how big is Buffett’s Burlington Northern bet?” Short answer: RR’s are madly fuel-efficient compared to trucks, America’s other main transport on land, and stand to benefit from “green” legislations that may hurt trucking.

Interesting irony: BNI hauls mainly coal currently, so you’ve got a domestic fossil-fuel play embedded in a “green” wrapper. Whether that makes you love or hate the deal more is up for brisk debate among Buffett-watchers – Salon’s business columnist Andrew Leonard is skeptical, while Seeking Alpha’s Edward Harrison likes the coal angle in the short-term.

The post-deal speculation is feverish. What other railroad stocks are poised to benefit? Many are turning to the Dow Jones Transportation Index and checking out its RR components like GATX, CSX and Union  Pacific (UNP).

What about playing the coal angle? Wikinvest’s entry on coal power and related companies is a great place to start.

Another theme: given this big bet, what stocks is Buffett likely to snap up next for his altered portfolio? Formula Capital managing director James Altucher told CNBC he’s waiting for Buffett’s next move in healthcare, citing Becton Dickinson (BDX) and Johnson & Johnson (JNJ) as Warren’s latest picks, overshadowed by the historic BNI deal.  

What’s your view? Are you heavying up on railroads, coal, or taking a 180-degree view from WB? Or do you think the moves of America’s biggest investor are over-reported by the financial media, and maybe some newer kids on the block know more than the old guy from Omaha?

Full disclosure: I don’t own any of the stocks mentioned above.

[image: Warren Buffett photo, reprinted from About.com]

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Posted by bigdog on 11/09/09 at 09:41 AM

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Man-song-puppet_thumb Brokerage Account

corbinb2 posted November 09, 2009 (11:43AM)

One of the quickest areas to trim costs, for any kind of manufacturing company anyway, is transportation. If you don't 'really' care when it gets there, you can't beat the train on large scale shipments. Inventories have been depleted to save money and now they will need to be replenished cheaply...Need I say more?

This was an absolute brilliant move by Buffet in my opinion. Unfortunately, Joe Schmoe investors like most of us here will only be able to ride on his coat tails and try to profit from it. We most certainly won't be making the kind of money he will on this investment just due to the shear size of it, but when Buffet talks, people listen. (Sorry Mr. Hutton)
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Wacko_and_crawford2_thumb Trader Network Account

mommiedearest posted November 10, 2009 (10:51AM)

If you've ever arrived at a railroad crossing just as the bells start ringing and the red lights start flashing, you know you're in for a LONG wait. So what do you do? You count the cars flying by your eyes. I usually give up when I get to about 232, because I know I'm going to be too dizzy to drive when the gates finally "go up". I would imagine Warren Buffet has found himself stuck in that situation at times, and done the math!
The nation's seven major railroad companies reported the following for 2007:
  • Moving 1,770,545,245,000 ton-miles of freight

  • Consuming 4,062,025,082 gallons of diesel fuel (including freight trains and trains in switching yards, but excluding passenger trains)
The average works out to be 435.88 ton-miles per gallon of fuel.

Some rail lines do better. The Soo Line, which is the U.S. branch of the Canadian Pacific, operating in the upper Midwest, reported moving each ton of freight 517.8 miles per gallon of diesel fuel, on average. Lines operated by the Grand Trunk Corp. reported 510.5 ton-miles per gallon.
 
The average highway truck can move 1 ton per gallon - 59 miles
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Don_1_thumb TradeKing Staff Member

bigdog posted November 10, 2009 (11:53AM)

Well said, Corbinb2 and Mommiedearest. Trains do seem to be an incredibly cheap and efficient form of transportation that fell off our collective radar somehow. I caught a radio ad while driving recently for one of the train companies. As Mommiedearest notes, their tagline claimed that trains can move one ton of freight about 436 miles on ONE gallon of fuel, which is a pretty impressive stat. That claim has even passed muster at factcheck.org: http://www.factcheck.org/askfactcheck/print_can_a_freight_train_really_move_a.html

Bottom line, I agree that Buffett is probably onto something here. It'll be interesting to see what ripple effects could happen as the investor spotlight shifts to railroads and related technology, too. If you see any interesting articles on the implications of the BRK-BNI deal, please do share 'em here!
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Man-song-puppet_thumb Brokerage Account

corbinb2 posted November 10, 2009 (01:26PM)

Great stats MD...that sums it up pretty well I think!
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2009-10-04_1931_thumb Brokerage Account

DavidDT Trading-to-Win.com posted November 12, 2009 (11:03PM)

Well, he needs to figure out yet another way to unload more of his stock - paying in "shares" rather in cash is the only way for him to do so.  Great bet on rising oil price, stagnant economy and continuing deterioration of price of main Berkshire holdings! Bravo Worren!
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