Warren Buffett and George Soros Concur on Burlington Northern Santa Fe Corp. (BNI) and Norfolk Southern Corp. (NSC), Differ on Union Pacific Corp. (UNP)

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Jun 15, 2007
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The investment styles of Warren Buffett and George Soros don’t have much in common, although they both achieved spectacular returns. Buffett tends to concentrate on a few ideas and holds them for long term, Soros, on the other hand, holds more than 3 hundred stocks and trades in and out them frequently.


As we review the recent purchases of Gurus, to our surprise, both Warren Buffett and George Soros bought rail companies Burlington Northern Santa Fe Corp. (BNI, Financial) and Norfolk Southern Corp. (NSC, Financial) during the first quarter. Warren Buffett started buying rail companies during the third quarter of 2006, and has been adding to his positions. By the end of March 2007, His investment company Berkshire Hathaway owns more than 34 million shares of Burlington Northern Santa Fe and more than 6 million shares of Norfolk Southern Corp. George Soros started buying both companies during last quarter. He owns a few thousand shares for both companies through his hedge fund, Soros Fund Management LLC. While Warren Buffett also bought another rail company, Union Pacific Corp. (UNP, Financial), Soros is already reducing his holding with UNP.


These three companies are among the largest railroad operators in the United States. Union Pacific Corp. has a market cap of $32.33 billion, it was traded at around $118.18 with P/E ratio of 19.44 and P/S ratio of 2.03; Burlington Northern Santa Fe Corp has a market cap of $31.51 billion, it was traded at around $89.14 with P/E ratio of 17.76 and P/S ratio of 2.09, while their smaller rival Norfolk Southern Corp. has a market cap of $22.06 billion, it was traded at around $55.41 with P/E ratio of 15.73 and P/S ratio of 2.33. Since Warren Buffett reported his purchases of rail companies, their stocks have gone up by more than 10%.


Interestingly, rail companies are also the favorites of other Gurus lately. Three other Gurus Initiated Positions in Burlington Northern Santa Fe Corp. (BNI, Financial) during the first quarter. Chris Davis bought 441,861 shares, which is 0.04% of the $91.56 billion portfolio of Davis Selected Advisers. Ronald Muhlenkamp bought 5,340, which is 0.02% of the $2.69 billion portfolio of Muhlenkamp Fund. David Dreman, the contrarian investor, bought 42,715 shares, which is 0.02% of the $19.6 billion portfolio of Dreman Value Management. As to Norfolk Southern Corp. (NSC, Financial), David Dreman owns 225,274 shares as of 03/31/2007, an increase of 628.41% of from the previous quarter. This position accounts for 0.06% of the $19.6 billion portfolio of Dreman Value Management. Norfolk Southern Corp. is also owned by Dodge & Cox funds and Brian Rogers in his T. Rowe Price Equity Income Fund. Chris Davis also bought into Union Pacific Corp., concurring Warren Buffett; while Brian Rogers reduces, agreeing with Soros.


Is it possible the Gurus that initiated their positions in rail companies are piggy-backing Buffett? Unlikely. Warren Buffett released the information of his purchases of rail companies in April. The reporting period of these Gurus ended on March 31, 2007. That is before they could learn the information from public channels.


Regarding to his purchase of rail companies, Warren Buffett commented in the Berkshire’s shareholder meetings that railroad business would never be "sensational," yet its prospects had improve. Charlie Munger, Vice Chairman of Berkshire Hathaway, commented during the annual meeting of Wesco Financial (WSC), Buffett and he himself “used to not like them because they needed large amounts of capital, had tough unions, and stiff competition from the trucking business. The paradigm had shifted. Now the railroad industry has a competitive advantage by double-stacking freight. With all of the imports from China, the U.S. has a huge amount of freight being sent across the county.”


GuruFocus readers think that Burlington Northern Santa Fe Corp. (BNI, Financial) and Norfolk Southern Corp. (NSC, Financial) are about 10-15% undervalued relative to their most recent market prices. Union Pacific Corp. (UNP, Financial) is fairly valued at around $118.


What are your valuations?


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