Warren Buffett Goes “All In” on America’s Railroad Industry
by David Fessler, Energy and Infrastructure Expert
Thursday, November 5, 2009: Issue #1131
Last Sunday morning, I embarked on a spirited 60-mile bike ride with a few like-minded 50-somethings. Our route took us along the beautiful Delaware River. The Delaware – named after the Indian tribe that crossed its waters – defines the north-south border between New Jersey and my home state of Pennsylvania.
As we stopped to enjoy the view, we heard the unmistakable whistle of a steam locomotive. We looked up and there it was – New York, Susquehanna and Western’s number 142 – a steam locomotive pulling a line of cars along the Delaware.
One hundred years ago, engines like this – and the rails they ran on – were the backbone of the railroads. When it came to freight and passenger transportation in the United States, railroads were the only game in town.
Flash forward to this week. Warren Buffett – one of the most astute investors in the world – just placed a big bet. He’s gone “all in” on America’s future and bought a railroad company.
So what does this mean for the railroad industry – and what’s the best way to profit from it?
Warren Buffett: Railroad Bull
“Railroads can [move freight] in a very cost effective way, and they do it in an extraordinarily, environmentally friendly way.
“Burlington Northern Santa Fe last year moved a ton of goods 470 miles on one gallon of diesel. It releases far fewer pollutants into the atmosphere, saves enormously on energy consumption, and diminishes highway congestion.”
So said Warren Buffett in a CNBC interview after announcing that Berkshire Hathaway (NYSE: BRK.A) would pay $100 a share for the 75% of Burlington Northern Santa Fe Corporation (NYSE: BNI) that it didn’t already own.
Ever the optimist, Buffett said the decision to make the investment was easy:
“Rails last year moved more than 40% of all the ton-miles of goods in the country. They moved more than all those trucks… just the four big railroads. It’s a very effective way of moving goods.
“I believe that this country will prosper and you’ll have more people moving more goods 10, 20, 30 years from now and the rails should benefit. It’s a bet on the country, basically.”
So what makes those lumbering, seemingly endless freight trains so efficient? And are they really an attractive investment right now? Let’s take a closer look…
Rail Freight: From Bust to Boom
In the years after World War II, the advent of cheap fuel and a brand new interstate highway system led to the rise of “18-wheeler” trucks. As a result, the railroads fell out of favor and inefficiencies and waste abounded.
The situation became so grim for the railroad industry that in the 1980s, the ton-miles per gallon rate for freight transportation was one-tenth what it is today. Many carriers went broke. In the intervening decades, 40% of U.S. railroad track was abandoned. Much of it was ripped up and sold for its scrap value.
But what a difference a few years makes…
- With the reality of “Peak Oil,” the nation’s railroads now carry 43% of all freight – nearly 50% more than all the trucks on the road.
- Rail transportation is more than three times as efficient, too. For example, you can move one ton of freight an average of 400 miles on one gallon of diesel. Compare that to trucks, which move one ton a mere 130 miles on a gallon.
- Hauling capacity is relatively cheap, too. The average cost for a new freight car runs about $81,000 – roughly one-third the cost of a new tractor-trailer truck. And you can string as many as 150 of them together behind a few diesel locomotives, which just adds to the operating efficiency.
- Nearly all heavy industries need cheap, bulk delivery. And products from cars to coal are already served by rail. Plus, unlike trucks that have to negotiate city streets and narrow roads, rail lines go under and over them. And they always have the right-of-way.
What’s more… the bulk of the railroad infrastructure is already in place, without the need for much addition. The system has plenty of excess capacity and serves all major cities and towns across America.
According to the American Association of Railroads, there are about 24,000 locomotives and 460,000 freight cars in the United States. They move around on 140,695 miles of maintained track.
Ride the Rails to Profit With Berkshire Hathaway
Burlington Northern Santa Fe isn’t the only railroad that Berkshire Hathaway owns. It also has stakes in Union Pacific Corporation (NYSE: UNP) and Norfolk Southern Corporation (NYSE: NSC). Both stocks rose on the announcement – and both are up significantly since Buffett bought them.
So if you want to jump on board the railroad industry with Buffett, consider Norfolk Southern. Here’s why…
- The company’s 21,000 miles of rails touch nearly all heavy industries in 22 states.
- It serves every major container port in the eastern United States and provides excellent connections to western rail lines.
- Its Crescent Corridor project – an existing 2,500-mile rail network that supports the supply chain from Memphis and New Orleans to New Jersey – is undergoing a $500 million upgrade and expansion.
- Three new terminals will be built in Franklin County, PA, Memphis and Birmingham. Track improvements and additions will result in faster freight transportation, efficiency and reliability. And it’s estimated to generate 47,000 jobs in the five partner states.
In his CNBC interview, Warren Buffett commented that businesses we’ve not yet imagined, run by people not yet born, will continue to fuel the United States. And consequently, he expects rail tonnage to increase, with the railroad industry benefiting.
“America’s best years lie ahead. There’s no question about that,” Buffett told CNBC. And with his full purchase of Burlington Northern Santa Fe, he’s putting his money where his mouth is. The move is a bet on the United States, its citizens and the American spirit.
Nice going, Warren. We need more patriots like you and T. Boone Pickens.
Good investing,
David Fessler
Any investment contains risk. Please see our disclaimer.
8 Responses to “Warren Buffett Goes “All In” on America’s Railroad Industry”
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David Fessler is the energy and infrastructure expert for Investment U.
Great article! Glad I own some.Thanks for the NSC idea. Let’s hope he’s right about US future.
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Sent to Pickens earlier: “Pickens, are you just another hog slopping at the public trough on the backs of our grandkids and greatgrandkids??? If what you propose is such a great idea, it would be economically viable on it’s own. Eric May, Retired Automotive Engineer”
Patriots?? You’ve got to be kidding! Neither Buffet or Boone are patriots. Buffet supported the current socialist/fascist regime get into power. At least Buffet is using his own money to create new wealth, and in that indirect sense only is he a patriot. Boone, on the other hand, is looking for a public subsidy to use nat gas as a transportation fuel with essentially no vehicles designed, developed, tested, certified, and no infrastructure in place even if there were vehicles. That requires more TAXATION WITHOUT REPRESENTATION OF FUTURE GENERATIONS. It is a stupider idea than corn into fuel, also a taxpayer funded idiocy. A PATRIOT would support Constitutional government not Boonedogles on the backs of future generations through inflation and taxation.
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Do you understand that socialism and fascism are on opposite ends of the political spectrum?
I do agree that patriotism isn’t the reason why Buffett is investing in such a way. Speculation on US economy isn’t patriotism, even if you are from US.
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Jimmy, you understand… Fascism (Italian name) is National Socialism, differs a little from other form of socialisms but they are all totalitarian systems. Get your education on firm footing. Do not get confused by leftists. All are acting like gangsters and, like different gangs, they will fight each other over turf and control. Or make aliences, if it suits them. Current US government is a mixture of Fascism, Socialism (controled internationally) and some Clasic Capitalism, where Capitalism is on the way out. Buffet just accepted that fakt and want to be on the side of “Progress” (if enslavement and death of our constitution can be called that).
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“Do you understand that socialism and fascism are on opposite ends of the political spectrum?”
They both are infinitely MUCH closer to each other than to libertarian capitalism of our founders. For founders they would be considered as the same.
The very fact that traditionally communists and fascists fight each other does not change anything. Stalin and Hitler are brothers in spirit.
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According to article; rails carry 43% of goods moved which 50% more than truck; i.e., trucks carry 29%. What carries the other 28%? Seems an awful lot for planes and horses.
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I laud Buffett’s vote of confidence, in both BNSF, and in his expectation of continued transport of coal and grain among other freight items. As to Mr. Buffett being a patriot, I’m not so certain. But there is no doubt he is an investor who has benefitted much from capitalism.
In partial reply to Hank Sherrard, a much freight is still moved by water, on our nation’s rivers and the Great Lakes. I ask Mr. Fessler to comment on the exact amount, and the cost per ton-mile.
Neither rail nor water transport can entirely replace trucks, unless we are going to build RR tracks and load/unload stations again in every small community and at multiple locations in larger cities. Trucks will always remain a critical component of our nation’s freight transport system due to their unmatched ability to pick up and deliver goods directly to nearly any location.
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Rail transport, especially electrified rail, is much more efficient, and less damaging to the environment, than transportation by car or truck. It can help to dramatically reduce energy use and carbon emission. Even better, it’s a win/win scenario for the economy, the environment and the fight against global warming.
http://www.selfdestructivebastards.com/2009/11/case-for-rail.html
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