Berkshire & Burlington: what a way to run a railroad.

[Nords]

Burlington Northern: Berkshire Hathaway nearing 25% stake - MarketWatch

Berkshire has apparently notified Burlington of Berkshire's intent to acquire at least a 25% (controlling) stake in the company. At $600M it's a rounding error among Berkshire's $45B cash stash.

If I'm reading the numbers right (BNI Profile), Berkshire could buy up all the remaining $82 shares for under $25B. (It's nice to be able to write those checks!) Of course that's all negotiable presuming management & shareholders are cooperative. I can't tell whether Burlington feels this is hostile or helpful, although if they thought it was hostile I suspect we'd have heard about it by now.

I have to admit that I don't get it, and this is why I hold Berkshire shares-- Buffett is apparently seeing something that we don't. BNI seems to have nice margins but I wouldn't have expected the difference between trucking & railways to be that great. Ratios don't look that special and the only apparent advantage to having Berkshire as an owner would be easy access to expansion capital and the usual executive cashout/estate planning. Buffett's certainly scooping up a lot of infrastructure assets in the last 10 years but for some reason he sees rail as being better than air. Or maybe a better way to say it is that in his opinion rail doesn't suck as much as air.

Anyone here in the railway/transportation industry? Any insider perspectives?

Maybe the gecko and the cavemen wanted to drive the locomotives...

 

[twaddle]

I always assumed it was an indirect bet on peak oil. If the price of oil goes higher, rail becomes more attractive.

 

[unclemick]

I always assumed it was an indirect bet on peak oil. If the price of oil goes higher, rail becomes more attractive.

Me too - in a vague sort of way. I'd like to hear the nuts and bolts nitty gritty why rail becomes more profitable as oil rises in price.

heh heh heh - a few shares of Union Pacific(Norwegian widow DRIPwise) AND a free 2008 calender.

 

[CCdaCE]

Guess who's the #2 buyer of diesel? I think it's the railroad. But, I guess they're still a pretty efficient use of diesel.

-CC

 

[chinaco]

Ditto the comments on cost of transportation.

Apparently he has invested in two others also.

StreetInsider.com - CNBC Said Besides BNI Buffett Invested In Another NA Railroad Stock


Plus, if we (as a nation) begin to increase the use of local resources for alternative energy... the rails and barge systems will likely benefit. For example, if we do ramp up usage of coal or is we start increasing the production of grain for ethanol... somebody has to haul it. And it will go to centralized facilities.

Rail is fairly efficient mode to haul freight compared to trucks. And barges do not go everywhere.

Environmental Advantages

It looks like BNI has had a healthy increase in income over the last several years. I have not analyzed their financials... But you can bet that Warren has.

I think the railroad companies have been able to utilize information technology to more efficiently manage their operations by better tracking of their cars... an age old problem.

 

[Ed_The_Gypsy]

Why buy railroads when you can buy oil?

 

[chinaco]

Why buy railroads when you can buy oil?

You will have to ask Warren that question.
When he buys in... I think does it for the long haul (no pun intended). He must see something that aligns with his style.


I think BRK.A does have some Petro holdings.

 

[terminator]

I think BRK.A does have some Petro holdings.

Some PetroChina and ConocoPhilips.

 

[twaddle]

Why buy railroads when you can buy oil?

I think it's reasonable to look at the second order effects of high oil prices. If a commodity price gets high enough, demand has to weaken. That will impact profits from any direct oil plays. And that demand should be taken up by existing alternatives. Fuel-efficient rail doesn't look like a bad play. Especially since the moat is HUGE. Try putting down a new cross-country rail line today.

 

[AltaRed]

Some PetroChina and ConocoPhilips.

Does anyone know if BH has said why they have bought into these 2 companies? It doesn't make sense to me unless Warren is seeing refining and product margins holding up for the long haul (which they might). Even then, the time to buy these were perhaps 3-4 years ago, not in 2005-2006.

 

[Nords]

Does anyone know if BH has said why they have bought into these 2 companies?

From the annual reports it looks like BRK bought its PetroChina shares in 2003 for $488M. The 2006 annual report marks their value at $3313M, for an annual return of barely 89%. Gosh, I can't figure out why Buffett bought them either!

Even at $3B it's a drop in the bucket to a company with a market cap of $170B.

 

[unclemick]

You know I heard that Warren broke down (at Bill Gates urging) and finally bought a computer to play Bridge over the Internet.

I ah er kept my Union Pacific stock DRIP - way back when even though they cut their dividend - BUT I still get my 'free' calender every year(with the cho cho pictures).

Since Warren owns more than one rail stock - I wonder if he gets a 'free' calender from each.

heh heh heh heh heh heh heh heh heh - they write books(and tons of articles) on how Warren 'sees' the numbers BEFORE they develop. Intrinsic value is still a mystery to me - like the calenders though!

 

[chinaco]

From the annual reports it looks like BRK bought its PetroChina shares in 2003 for $488M. The 2006 annual report marks their value at $3313M, for an annual return of barely 89%. Gosh, I can't figure out why Buffett bought them either!

Even at $3B it's a drop in the bucket to a company with a market cap of $170B.

Apparently Buffet is selling PetroChina (a little at a time).

 

[AltaRed]

Apparently Buffet is selling PetroChina (a little at a time).

Given frothy Chinese valuations, this probably makes sense. An unusual move by Warren to flip stock, but hey, this may have been seen as one of those few 'no lose' propositions to make some bucks back in 2003.

Would still like to understand why he bought into COP though.. for the refining margins he saw increasing (as they did particularly in 2004-2006)? I doubt it was because of COP's Russian venture given the unpredictability of Putin.

 

[heyyou]

John McPhee has written about railroads and their employees, and has ridden on a BN coal train from the mine to the power plant. He mentioned that hauling low sulfur coal in the West has resurrected RR lines that were dying from trucking and inefficientcy. BN is the best run RR. Of McPhee's 30? books, I don't know which one has the info. If you are a BH shareholder, reading McPhee would be informative about their new acquisition.
I agree with twaddle about the moat. They aren't making any more RR right of way. The existing right of way has visible rails and buried gasoline and communication pipelines.
If you have driven on Interstate 40 across Arizona and New Mexico, you've raced those long trains of double stacked cargo containers full of Chinese goods headed east. The locomotives may still be Santa Fe RR sunset colors, but the initials are now BNSF.

 

[chinaco]

Given frothy Chinese valuations, this probably makes sense. An unusual move by Warren to flip stock, but hey, this may have been seen as one of those few 'no lose' propositions to make some bucks back in 2003.

Would still like to understand why he bought into COP though.. for the refining margins he saw increasing (as they did particularly in 2004-2006)? I doubt it was because of COP's Russian venture given the unpredictability of Putin.

That sounds like a good reason. Average out and take some profit.

Not sure if this is true... but a cnbc person cited it was being sold because some shareholders are upset with Petrochina's links to Sudan.

 

[ERD50]

Rail is fairly efficient mode to haul freight compared to trucks. And barges do not go everywhere.

Environmental Advantages

Interesting link. But hey, in a few years, if the Global Warming predictions are correct, barges WILL go almost everywhere!

Ya gotta look for the silver lining

-ERD50

 

[greg]

. . . Buffett is apparently seeing something that we don't. BNI seems to have nice margins but I wouldn't have expected the difference between trucking & railways to be that great. Ratios don't look that special and the only apparent advantage to having Berkshire as an owner would be easy access to expansion capital and the usual executive cashout/estate planning. Buffett's certainly scooping up a lot of infrastructure assets in the last 10 years but for some reason he sees rail as being better than air. Or maybe a better way to say it is that in his opinion rail doesn't suck as much as air.

Anyone here in the railway/transportation industry? Any insider perspectives?

How about an outsider one?

Maybe we need to know what the current cost of hauling materials per ton is among trucks and trains? My guess it that the differential is substantial. I think as the price of transport fuel increases to a larger portion of transportation costs for all of us consumers, we'll see a paradigm shift to more use of trains to haul cargo, more sophisticated distribution and hand-off techniques to reach the final point of sale or use. And by owning a rail road he owns the first trickle down point and may control or have sway over what happens after that first leg of distribution.

I think Buffett mostly looks long-term, and I believe he sees major changes in basic operations/infrastructure models. I suspect a re-rationalization of the American transportation system is just beginning. Cavemen? Off with their heads! Lizards . . . ? De-election them!

 

[unclemick]

Not to mention drywall -17 mil shares or so - the man is nothing if not patient. Dribs and drabs thru the asbesto litigation cycle, thru the real estate bubble - a little loan - a few shares.

And that dirty old man bought my Clayton Homes and Bandag too cheap - the skinflint.

I do watch what he buys over the years.

heh heh heh - I'm keeping my UNP calender for next year.

 

[terminator]

And by owning a rail road he owns the first trickle down point and may control or have sway over what happens after that first leg of distribution.

If memory serves me correct, BRK bought McLane (a huge distribution company) from WalMart a few years ago.

 

[unclemick]

Hmmm - since he bought goodly amounts of all three - BNI, UNP, NSC, I am tempted to add some more to my UNP DRIP which I haven't canceled yet - to sort of go with my free calender.

The other two rails I'd have to think/analyze/procrastinate.

But a 'live' DRIP plan and a little mad money?

heh heh heh - why even pretend to be rational? ER is fun!

 

[Ronstar]

In the southwest suburbs of Chicago, the transportation industry is growing by leaps and bounds. It seems that goods from China can be more effectively delivered to points in the US by first shipping from China to west coast, then rail to Chicago, then truck elsewhere. BNI is big in the intermodal scene.

http://archive.seacoastonline.com/news/04082006/biz_nati/96799.htm

 

[greg]

If memory serves me correct, BRK bought McLane (a huge distribution company) from WalMart a few years ago.

To me this is more evidence of scaling up in land transport in this country. If BRK owns even bits and pieces of what in the future could be an integrated package offered to those who need transport services . . . ka-jackpot.


Ronstar said:

In the southwest suburbs of Chicago, the transportation industry is growing by leaps and bounds. It seems that goods from China can be more effectively delivered to points in the US by first shipping from China to west coast, then rail to Chicago, then truck elsewhere. BNI is big in the intermodal scene.

RRs originally were utility like. Ya got yur franchise, ya behaved and didn't get too greedy, and the money poured in. Over the years it's sort of been warped and distorted into fragmentary entities. While it certainly isn't necessary to, um, nationalize things, I'd like to see some sort of rationalization of the process so that companies could send things a bit easier. An airline sort of hub and spoke system as mentioned above around the Chicago area might work well if scaled across the country. One wouldn't need just one national RR, but it would require a lot of cooperation among and between them and between and among the truck companies and distribution points and warehouses. Everyone could benefit. Today's computer systems are a prerequisite to this unfolding like this. Couldn't have happened before them. Maybe a positive Black Swan event? But very slowww, like the evolution of McDonald's in fast food.

Buffett may see something like this happening over the next decade or so. Right now I know many companies don't even think train; they just ship by truck (with all its ineffiencies and expenses), sometimes 3000 miles, without thinking thru other possibilities. It seems to me that if you can do something about the first fifty miles of transport to the RR and the last fifty miles from the RR and then get the RRs to do better hand offs between each other, these folks could reduce truck transport significantly and save huge amounts of fuel and shipping costs. Maybe, if they aren't already doing it.

 

[unclemick]

Hmmm - with utility like yields - I bought UNP in a DRIP waaay back before they cut their dividend and still had the trucking company as part of their operations.

I could say (but not with a straight face) I saw it coming before WB - but in fact I hadn't got around to selling tax wise or gotten a great passion for another dividend stock to 'make' me make the move.

I was more in the blind squirrel/acorn class - but that won't stop me from buying more and pontificating like I knew better all along.

heh heh heh - Aetna is another stock(with a div cut) like that - started acting better before I got around to consider selling.

 

[greg]

GE Introduces New Fleet Management Technologies for Railcars and Intermodal Assets: Financial News - Yahoo! Finance