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Chris Mayer
Chris Mayer
Articles (5983) 

Buffett’s Investing in Burlington Northern Santa Fe in Early 2009

February 10, 2009 | About:

The Financial Times led off one headline column this week thundering:

“The world economy will this year suffer its worst performance for more than 60 years with a serious risk that 50 million people will lose their jobs, international organizations warned yesterday.”

The consensus has gelled. Now it’s just a matter of who can come up with more staggering figures. The IMF says global output will fall for the first time since the World War II. And 50 million are a lot of people.

Where to invest is the question. In pockets of strength is one answer. Where might these be?

Warren Buffett likes railroads and recently upped his stake in Burlington Northern (BNI). He now owns 22% of the company.

The railroads are interesting because they have put up increases in earnings despite declines in freight volume. Union Pacific (NYSE:UNP) reported a 35% rise in fourth-quarter earnings, despite a 12% decline in carloads. CSX (NASDAQ:CSX) reported a 16% gain in earnings. Burlington, Buffett’s darling, reported a 19% increase. Canadian National Railway (NYSE:CNI) chipped in an 11% increase.

A good chunk of those increases is due to a lag effect in fuel surcharges. When those fuel surcharges come down, as the price of oil is now much lower, so too will some of those earnings. But not all.

In fact, railroad executives have been pretty confident in their ability to continue to raise prices on their customers. Railroads have to compete with truck and other means of transport in many cases. The railroads say that even with the increases, it’s cheaper to ship by rail than it was 28 years ago — adjusted for inflation.

Railroads are also pretty green. One rail car can carry freight 436 miles on one gallon of fuel, according to the American Short Line and Regional Railroad Association. And it emits far fewer carbon emissions than a truck, at a time when that could be very important.

Even so, the freight volume falloff has investors worried. Union Pacific chief James Young said that freight volumes fell 18% in the first three weeks of January. In some areas, the drop-off is really something — like the 60% drop in auto-related freight Young cited.

Whew, you see stuff like that and you think the world must really be coming apart at the seams. Still, Buffett is a buyer, and the prices might discount a lot of bad news already. Many of the big railroads trade for single-digit price-to-earnings ratios, and the industry as a whole goes for about 9 times earnings.

Buffett isn’t the only one taking a look at railroads. Donald Coxe, another investor I respect, thinks it is also a good time to be looking at the railroad stocks. “They benefit from lower energy costs,” he writes in a recent note to clients, “which may offset a significant percentage of the cutback in top-line revenues during the recession. Coming out the other side, they should be core investments.”

David Winters, of Wintergreen Advisers and another investor with a good long-term record, also likes railroads. He calls them “unduplicable franchises” protected by huge costs of entry.

In addition to railroads, there is timberland. As I’ve noted before, timberland values have held up well in this mess. The Wall Street Journal recently ran a piece on timberland and included this chart.


How can timberland values continue to climb when nearly everything else is going to pot? The WSJ quotes Jeremy Grantham of GMO: “As long as the sun shines, the trees will grow. Timber will never be an orphan.” Timberland appreciation for the past decade was 4.1%, versus a negative 3.8% for the S&P 500, according to the WSJ. That kind of long-term appreciation has always been timberland’s great appeal.

The other great part about timberland is if timber prices are unfavorable, you just don’t harvest your trees. You let ’em grow. And their value increases anyway. “Trees keep growing 4% per year, no matter what happens to inflation, interest rates or market trends,” says Dennis Moon, quoted in the WSJ story. Moon is head of U.S. Trust’s group overseeing timberland. “You don’t have to cut them down this year if that doesn’t make sense.”


Chris Mayer


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