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Mike Rubsam
Mike Rubsam

What’s up with Berkshire’s Burlington Northern buys?

August 28, 2007 | About:

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 .

About the author:

Mike Rubsam
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.8/5 (29 votes)


Highroi - 10 years ago    Report SPAM
Good post however very little oil is transported by rail.

Pipelines are more economical than rail and the current projects planned by enbridge, imperial oil, conoco phillips and transcanada will adequately serve the future capacity.
Billytickets - 10 years ago    Report SPAM
It is my understanding that the railroads have a lot of land on the books at very low prices however i have not personally confirmed that. if WEB is buying there is NO DOUBT a very valid reason
Musto - 10 years ago    Report SPAM
I bought BNI after reading a historical book on railroads.

In keeping up with my discipline of summarizing the reasons

for buying any stock following is my original thoughts written in an

unorganized manner..

BNI: Too many things in their favor. Has the most potential for growth. The trucks can never compete with the economics of transportation of the railroads. In the past, regulations were not very favorable for the railroad. It’s become better of lately. The devaluation of dollar may further increase the price of oil in US dollars, making the

economics of train transportation wrt to trucks even better. The trucks get a free ride on the back of the highway system which is taxpayer financed. Even then the truck drivers can’t even make their amortization back. They make a miserable wages. The railroads on the other hand spend large amounts of capex to maintain their tracks but in the past

were not allowed to recover that due to government oversight. BNI has the shortest route from (South West) Pacific to Chicago. UNP is the only other guy with a route to Chicago from the North West Pacific. So the increased Pacific traffic will benefit BNI. Now, the second point is that there are several coal based power generators that are either in construction or in planning. The electricity demand is on the rise due to internet server farms, and a possible substitute (perhaps by 2010 or so) from gas engine cars to electric cars where it’ll be cheaper to plug in your battery to the grid than running it on the expensive oil. In terms of supply the US is the Saudi Arabia of the coal, and coal is cheap cheap cheap. The increased use of coal for energy generation will benefit their primary

carriers mainly the railroads. The railroads are a very interesting play. I’m very excited about the BNI.

BNI is a long term growth story and some of the points raised above may not come to realize. However, there are too many wildcards and some of them will play out very favorably for BNI.

Billytickets - 10 years ago    Report SPAM
The answer you read above is why EVERYONE should read gurufocus and recommend it to their friends Great job musto
Julierub - 10 years ago    Report SPAM
Excellent reasoning and writing. Thanks for a well thought out article.
Mrubsam - 10 years ago    Report SPAM
As an addendum to this article, another thing that could be interesting to Buffett about BNI vs. UNP is revenue per employee. In 2006 UNP did $15.6 B in revenues with 50,700 employees, while BNI did $15.0 B in revenue with 41,000 employees (per Fortune 500 data). If wage pressures increase over time, this should play to BNI's advantage.
Hibachi0 - 9 years ago    Report SPAM
This may be the best article i have read on a free site. you sold me
Ccyork - 9 years ago    Report SPAM
musto Wrote:


>The trucks can never compete

> with the economics of transportation of the

> railroads.


i appreciate your well-thought out investment thesis on BNI. i just wanted to point out for clarification that economics favor railroads on long hauls only. for short hauls, the economics favor best-of-breed trucking firms like KNX. this in no way diminishes the value of BNI. trucks and railroads have coexisted for years, and they will continue to do so

-- ccyork

relax. educate yourself. think for yourself. draw your own conclusions. invest accordingly
Jrerickson003 - 9 years ago    Report SPAM
Something I thought about today. Montana also has massive amounts of coal deposits, on par with Wyoming I understand. We are not extracting much of it yet, but as coal power expands and clean coal technology advances this coal along with additional coal in Wyoming will be mined. BNSF controls these areas and it could mean serious revenue. This is another one of those things that will either turn out pretty good or really good for the company. One of the many opportunities for growth.

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