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Buffett’s Betting on the U.S. Economy; Should You?
Recently, Warren Buffett, the legendary investor and manager of Berkshire Hathaway (BRKB), announced that his company completed the purchase of the remaining shares of Burlington Northern Santa Fe. Before this acquisition was made public, Berkshire already owned more than 20% of the railroad’s outstanding shares. Although the deal adds a nice piece to Berkshire’s already sizable and diverse portfolio of companies, the more important factor may have been Mr. Buffett’s reasons for the purchase. Indeed, countless investors hang on every word that flows from Mr. Buffett believing that a successful investment strategy can be created if they can decipher his intentions.
Burlington owns one of the largest railroad systems in the U.S., operating about 32,000 miles of track connecting the Midwest, the Pacific Northwest, Canada, and the Gulf of Mexico. The company derives the bulk of its revenues from transporting consumer goods, industrial products, coal, and agricultural products. Due to the recent recession, the weak housing market, and increased unemployment, rail transportation declined. However, Mr. Buffett believes that the U.S. economy and, in turn, the railroad industry will rebound eventually: "It's an all-in wager on the economic future of the United States, I love these bets."
Well, if Mr. Buffett is correct, and the U.S. economy does recover, it may be a good idea for investors to focus on railroad stocks. Mr. Buffett did provide some clues in regard to his overall mindset. He mentioned that he preferred railroads to trucking. Trains can stack containers and thus, haul a great deal more than trucks.
The rails offer a more eco-friendly option, as well. According to Berkshire, “American railroads move 40 percent of our nation’s freight, but account for just 2.2 percent of all transportation-related greenhouse gas emissions.” Mr. Buffett added, “Rail transport uses one-third less fuel and pollutes the air less than trucks, and that one train can supplant about 280 trucks.” This fact could help the industry, since trains are less dependent on the vagaries of the fuel-cost cycle.
Mr. Buffett also mentioned that the decision to purchase Burlington was made with the long term in mind. “There will be more people in this country 10, 20, 30 years from now. They’ll be moving more and more goods back and forth to each other and the most environmentally friendly and cost-efficient way of doing that is railroads.” If Mr. Buffett’s vision is correct, the railroads would probably benefit from Congress’s current debate in regard to strategies and methods to update and improve America’s infrastructure, as well as implement more “Green” initiatives.
Interested investors may want to look at the companies within Value Line’s Railroad Industry, particularly the larger players, such as:
CSX Corp. (CSX) – It employs almost 30,000 workers and owns about 21,000 route miles in 23 states and two Canadian provinces. Its tracks connect the Northeast, the Midwest, and Canada with the Southeast. It also owns a 42% stake in terminal and switching agent Conrail. Coal, fertilizer, chemicals, automobiles and parts, and agricultural products are the most common cargo items that are transported.
Norfolk Southern (NSC) – The company operates more than 20,000 miles of track in 22 eastern and southern states, plus the District of Columbia. It also owns a 58% stake in Conrail. The 2008 freight revenue mix was coal, 29%; intermodal, 19%, agriculture/consumer products, 12%; metals/construction materials, 12%; other, 28%. It employs about 30,800 individuals, and labor costs account for approximately 25% of total revenues.
Union Pacific (UNP) – It is the largest railroad in the nation in both track miles and total revenues, with over 48,000 employees and 32,000 route miles serving the western two-thirds of the U.S. The company divested Overnite Trans. Co., an interstate trucking company, in November, 2003. The 2008 revenue mix was energy, 22%; industrial, 19%; intermodal, 18%; agricultural, 18%; chemicals, 15%; other, 8%.
Berkshire Hathaway’s purchase of Burlington Northern has helped bolster its already giant footprint. More important, though, it may also be Mr. Buffett displaying his belief that the U.S. economy is poised for a material recovery. Investors who agree with him might want to follow suit and purchase stock in a railroad.