Warren Buffett has been buying Burlington Northern Santa Fe (BNI) in “all you can eat” quantities at or below $80/share. Since purchases were made public months ago and some initial analysis was done in the press at that time, yet Buffett is still buying, it seems a good time to think about why he continues to buy this stock.
BNSF has had fairly soft volumes in 2007, compared with 2006, especially in intermodal (containers and trailers) and lumber/building materials. Coal and grain volumes have held up well, but Buffett is likely not buying for 2007 performance.
We know that railroads offer pricing advantages over truckers that increase with higher oil prices, and that BNSF has a network that spans from the Pacific through the heartland and to the Gulf of Mexico.
But what else is there that could make this company even more valuable over the next decade, and potentially even more valuable than Union Pacific?
I venture that it comes down to the BNSF rail lines through the Dakotas and Montana.
If you look at BNSF’s route map compared with Union Pacific’s, there is considerable overlap everywhere except for the northern plains states. Big deal, there is nothing up there…well, not exactly.
First, there are connections to Canadian lines through North Dakota (Canadian National Railway) and Montana (Canadian Pacific Railway). This is important for a few reasons. Canada is expanding oil production from its oil sands over the next 10 years, and a considerable amount of this oil will be refined and consumed outside of Canada. Some of this will come through the northern U.S. While Canadian National Railway has track in the U.S., it enters the U.S. way east of BNSF track, increasing cost. Canada is also a large grain producer, and this production is heavily concentrated in Saskatchewan, which borders Montana and North Dakota.
As the U.S. is still a primary market for Canadian exports, and BNSF is the owner of the closest “port of entry” for Canadian oil and grain (not to mention potash and other minerals), BNSF will naturally end up hauling a lot of this material. If you pull up the route maps for BNSF, Union Pacific, and the two Canadian rails it makes the discussion a bit easier. For Canadian producers to avoid BNSF track, they either have to go over the Canadian Rockies and down to Vancouver, or east through Minnesota. Since “inputters” ultimately pay the freight bills, they want to pay the shortest distance.
Second, it stands to reason that economic activity in Montana and the Dakotas will increase over the next decade. A new generation of more drought-resistant crops could make marginal land in the northern plains more productive, and BNSF hauls much of the harvest. Ethanol production may or may not stay “hot”, but even if it doesn’t, the ever-hungrier world demands more and more to eat, so I expect that more and more land will be planted. More plantings means more harvests which means more ears of corn ride the rails. Also, mineral exploration across this region is exploding, and somebody has to haul this heavy stuff to market. That somebody is BNSF.
Like Union Pacific, BNSF already owns track across much of the heartland, and will benefit from larger crops in the future. BNSF also hauls a lot of Powder River Basin ( Wyoming) coal, which is in demand for power generation, a trend that should continue. Intermodal volumes will vary according to economic conditions, but are also interesting over coming years as truckers face many headwinds.
We know that Buffett is a fan of real trade, not “pseudo-trade” using dollar-denominated IOUs, and if we extrapolate what this means for the United States over coming decades, it means the U.S. will have to produce more goods. To the extent this happens, BNSF will benefit. The U.S. has massive coal reserves and a great farm belt, and I expect a lot of our IOUs will be paid from these assets. As BNSF’s transportation network is ideally positioned in these geographies, I doubt this is lost on Buffett and Berkshire.
Mike Rubsam is President of Liberty Steward Capital, LLC (www.libertystewardcapital.com), and is long Berkshire Hathaway B (BRKB) and Burlington Northern Santa Fe (BNI). He holds no other positions in companies mentioned in this article. Liberty Steward Capital is a Registered Investment Adviser in the State of Colorado .