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Warren Buffett Bought Two Other Rail Companies

April 09, 2007 | About:

Warren Buffett Bought Two Other Rail Companies, according to CNBC television, which conducted an interview with Warren Buffett. Apart from the BNSF (BNI) share purchase, Berkshire had spent $700 million on one of the additional rail investments and slightly less on the other.

It is not clear which these two railroad companies are. A lot of guessing work is already going on Wall Street, as we see all the railroad stocks are going up. Union Pacific Corp. (NYSE:UNP) were up $7.14, or 6.92 percent, at $110.34, while the other major U.S. railroads CSX Corp. (CSX) and Norfolk Southern Corp. (NYSE:NSC) were both up around 6 percent. Burlington Northern Santa Fe Corp. (BNI), the company that Warren Buffett has bought, was up more than 16% at one point.

During his last shareholder letter, Warren Buffett claimed that there were two stocks that are not open public and he was still buying more. We are hosting a contest guessing what the two stocks are. Now we can focus the guessing game to railroad companies. GuruFocuser Vooch has already done his part, he thinks these two companies are Canadian National Railway Company (NYSE:CNI) and Norfolk Southern Corp. (NYSE:NSC).

What are these two companies? Tell us what you think?

Rating: 2.8/5 (4 votes)


Magalengo - 10 years ago    Report SPAM
I am having difficultly understanding Buffett's thinking on this three investments totaling about $4.5 billion. The railroad stocks are up over 2 times in the past three years and are at historically high valuations. Buffett has said in the past that a great business typically don't need large amounts of capital for fixed assets and the railroad business doesn't fit that standard. Buffett's largest investment is Wells Fargo with a cost of $3.6 billion. So this new stake in railroads is a major commitment. Why not buy more American Express,Wal-Mart, and Conoco Phillips while they are trading at bargin levels. I will not ride his coattails on this position because I can't follow his reasoning.
Sgeranpa - 10 years ago    Report SPAM
My sentiment exactly. I can't fathom his reasoning either. Is BNI really better value than wmt for example? Wmt can grow unabated for many years if not decades, and, it has a moat the size of lake michigan.

Armeetofo - 10 years ago    Report SPAM
me too, anyone can tell me the reason that he sold out the Target shares according to his thinking
Pault - 10 years ago    Report SPAM
I find it interesting that Bill Gates has been buying CNI since 2000 and is the largest shareholder.

In terms of understanding Buffett's thinking, I don't think his style is as rigid or predictable as so many believe. I've heard it regurgitated a million times - wide moat, discount to intrinstic value, honest and competent management, circle of competence, great industry economics, competitive or cost advantage, high and increasing ROE, relatively high and increasing margins, appropriate level of debt, highly selective and focused portfolio, buy and hold and never sell etc. but in reality, not only does he violate these rules but does the complete opposite of what he or others say sometime.

Just some examples that come immediately to mind:

* IR - management's target for growth is 8%, 4% of which is supposed to come from acquisitions. That doesn't sound Buffett-like.

* IRM - did he mistakenly add an extra zero to his discount cash flow calcs?

* SNY, JNJ - what happened to him never buying a pharma because it's too difficult to understand

* many examples of very small purchases of marketable securities, some of which have gone down -- I thought he always acted aggressively when he finds something and never averaged down or built up positions?

* TGT, IRM (original purchase) - what happened to buy and hold?

* GCI - has described newspapers as a dying industry - what happened to buying a company in an industry with good economics that you could feel comfortable owning for 3 years if there was no stock quotes available.

* HD - I guess the champion of reasonable compensation was willing to look beyond the criminal compensation package Nardelli had when Buffett invested

* BRK has approx. 40 holdings in marketable securities and a large number of companies that it owns completely. I never heard him talk about ownig your top 80 ideas.

I could be wrong about some of these facts but my point is that he doesn't operate exactly how everyone thinks he does. Only if your dad was a broker, and you attened Columbia and was taught by and then worked for Benjamin Graham, and all your friends were captains of industry, and you spent 50 hours a week reading and had 50 years experience would you understand.
Vooch - 10 years ago    Report SPAM
The answer is: (High Barriers to Entry) + (Pricing Power)

(1) It's impossible to reconstruct a new railroad in the USA from scratch. Where you gonna find the real estate land for all those narrow routes. You can't.

I could reconstruct Google from scratch since the Barriers to Entry are so low. Of course, I don't have the brand name as them, but nonetheless, I could replicate what they're doing at low cost.

(2) Railroads are the lowest-cost mode of transportation - it's been known for at least 20 years.

(3) Energy prices are rising, which force an exponential cost per pound, for an air company versus a railroad. As price/gallon widens, the economic moat widens for railroads.

Buffett is brilliant!

- Vooch

Sgeranpa - 10 years ago    Report SPAM
Vouch, I am not convinced. If your arguments are correct, why is he buying them now? BNI has in fact tripled in value over the last 4 years. Meanwihle WB has been sitting on $40B cash for years, apparently not being able to find good investments opportunities!

I’m not too sure about railroads having much pricing power. They still face stiff competition from road transportation. And if oil prices were to drop towards the cost of production (which is what happens in the long run), railroad transport will lose its current edge.

Also, railroad businesses are very capital intensive. They have to spend much of their cashflow on upkeep. For that reason, over the long haul they have failed to outperform the broader market!

I’m wondering if it’s an asset play. Maybe the amount of land they own for example having been understated on their balance sheets. Just guessing here.

Or, is WB finally going senile? LOL

Joesao - 10 years ago    Report SPAM

I agree with what you're saying, but keep in mind that a lot of those purchases weren't made by Buffett, but by Simpson under GEICO instead.
Richday101 premium member - 10 years ago
Beside BNI, CI think he purchased CSX and NSC.
Richday101 premium member - 10 years ago
Beside BNI, I think he purchased CSX and NSC.
Dude - 10 years ago    Report SPAM
I agree largely with Vooch here - oddly because its often I don't.

The industry has high barriers to entry (because of the large upfront cost of laying track, the limited availability of a clean line of land to lay the track and the access to terminal destinations), each railway operator generally only has one other competitor in each region (following consolidation over the last decade), and they accordingly have real pricing power, albeit that such power reveals itself in times of strong demand (which for most goods carried is quite cyclical). Particularly given the currently high petrol price, it is by far the most efficient means of transport. One way you could understand it is if you think of how a coal mine or a farm transports its coal or corn to the power station or the warehouse then how do you get it there. Given the alterntives, inevitably you have to pay a toll to a rail company (theres generally only two at most you can go to) to use their track. Yes, its capital intensive but not as much as you may think. The largest part of the capital expenditure comes upfront. And while there is still significant ongoing expenditure (some of which falls under capital expenditure and some of which falls under expenses) a not insignificant portion of this is directed towards growth (especially at the moment) rather than maintenance to merely stand still.

Its not an industry that in the US I've really looked into much and I suspect, reading from the blogs, not one that many others have as well. Thats because its not known as an industry that makes much money for shareholders. However, consolidation has changed the industry somewhat over the last decade (owing to consolidation) and its recent few years has confirmed the real pricing power the players have. Meanwhile investors have continued to view the industy with disdain, and this has perhaps allowed the opportunity.
Armeetofo - 10 years ago    Report SPAM
how do you know this? I am surprised
Armeetofo - 10 years ago    Report SPAM
I mean how come the purchases were made by simpson, not Buffett himself? and the reliable resource?
FA - 10 years ago    Report SPAM
BNI revenue, EPS, FCF has been increasing. BNI is also in good financial position being able to pay off its debts using the CF in under 3 yrs. The company also have been paying dividend and buy back stocks. Anyway he already earn hundreds of millions from BNI with the increase in stock pice

tony minadeo
Tony minadeo - 10 years ago    Report SPAM
i just want to retire ibot 4 buffet stocks and made money on all im way up on tyc but when to sell before breack up or after
Saab123 - 10 years ago    Report SPAM
BNI is selling at even times operating cash flow. They are exiting a high-capex cycle. Buffett will get all that investment for free. In 2-3 years time, 90 dollar per share will mean 7 times op cash flow, with much less capex needs. BNI is cheap by the numbers alone. Why didn't he buy it earlier? I believe it's because it is only now obvious that the US trade deficit with China is going to create a permanent volume flow from Westcoast inwards the like we've never seen before. This is also what BNI management has pointed to in the latest presentations to investors. I believe his investment has less to do with domestic energy consumption.
Saab123 - 10 years ago    Report SPAM
i mean ELEVEN time ocf
Tilfordjim007 - 10 years ago    Report SPAM
UNP is the largest land owner in the U.S. They also transport millions of tons of coal per year. Even with all the talk of renewable energy, the fact is the U.S. generates 50% of it's electricity from coal and will for quite some time. We know W.B. recently became fond of coal,could UNP be one of his other railroad interests?
Crafool premium member - 10 years ago
I believe the two other rail companies purchased by Buffett are Norfolk and Union Pacific. My speculation is based upon my belief that he his targeting coal, as well as the substantial benefits rail has over trucks for transporting goods.

I believe Buffett has great understanding of the energy situation in this country based upon his experience and managers(i.e. David Sokol manager of Mid-America Energy, Berkshire's pipeline business carries around 10% of the nation's natural gas, PetroChina and ConocPhilips), and the belief that late 1990's oil and gas prices were the result of Asia going through the equivalent of our 1930s depression and likely at a level we will never see again. He has stated numerous times that the nation needs to look at nuclear to solve its energy needs, however no one wants to build any nuclear plants because of the not in my back yard crowd to the what do we do with the spent fuel rods, issue. Our nation has two major energy sources natural gas and coal. We are the Saudi Arabia of coal.

Coal plants are far cheaper than natural gas, and nuclear and many coal power plants are in the pipeline for construction. Coal transportation will increase annually going forward. I believe the two rails mentioned above along with BNI have great exposure to coal. Buffett likes businesses that have pricing power and great advantages. There is no doubt that the rails have pricing power. It is noted that most rails could raise prices today by 10% and not see a decrease in their shipments. These companies are back to their monopoly days from long long ago.

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