Tuesday, March 8, 2011

Buffett on Railroads

From a recent interview of Warren Buffett by CNBC's Becky Quick.

In the interview, Buffett is asked whether he'd be interested in purchasing more U.S. railroads at the right price.

He first points out that Berkshire wasn't required to sell Norfolk Southern (NSC) and Union Pacific (UNP) but they did anyway:

And that probably cost me at least a billion dollars. I liked those stocks. I mean, I knew those companies were going to do well. And legally we didn't have to do it, but we thought that probably was a good idea. And now I think it's a bad idea.

Then later added...

The big railroads in the United States have a common future now. I like the ones in the West a little bit better than the East, but there are fundamental reasons why railroads were going to do well, and...if I could have been loaded with other railroad stocks as well as buy the BNSF, I would have done it.

Buffett also had the following to say about BNSF in the 2010 Berkshire Hathaway (BRKa) shareholder letter:

The highlight of 2010 was our acquisition of Burlington Northern Santa Fe, a purchase that's working out even better than I expected. It now appears that owning this railroad will increase Berkshire's "normal" earning power by nearly 40% pre-tax and by well over 30% after-tax. Making this purchase increased our share count by 6% and used $22 billion of cash. Since we've quickly replenished the cash, the economics of this transaction have turned out very well.

A paragraph later he added this about the advantage railroads have over trucking...

Both of us [Charlie and Warren] are enthusiastic about BNSF's future because railroads have major cost and environmental advantages over trucking, their main competitor. Last year BNSF moved each ton of freight it carried a record 500 miles on a single gallon of diesel fuel. That’s three times more fuel-efficient than trucking is, which means our railroad owns an important advantage in operating costs. Concurrently, our country gains because of reduced greenhouse emissions and a much smaller need for imported oil. When traffic travels by rail, society benefits.

Over time, the movement of goods in the United States will increase, and BNSF should get its full share of the gain. The railroad will need to invest massively to bring about this growth, but no one is better situated than Berkshire to supply the funds required. However slow the economy, or chaotic the markets, our checks will clear.

The stocks of North American Railroads (NSC, UNP & CSX in the U.S. along with CNI & CP in Canada) have unfortunately rallied quite a bit.

A future pull back in market prices will hopefully present an opportunity to buy more shares.

Adam

Long position in BRKb and NSC
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