AusRAIL, Market Sectors

Buffett?s rail bet on America pays off

<span class="" id="parent-fieldname-description"> COMMENT: Investment guru Warren Buffett’s biggest ever purchase – of the US’s largest railroad at the height of the GFC – is paying off in spades, with record profits and dividends. In fact, coal companies are complaining that the rail network can’t cope with demand. </span> <p>When investment guru Warren Buffet paid US$26.5bn for around three quarters of US railroad Burlington Northern Santa Fe (BNSF) in the aftermath of the GFC in 2009, some US pundits questioned his sanity.<br /><br />At the time, Buffet, whose compound returns from his Berkshire Hathaway conglomerate equate to 19.7% per annum from 1965 to 2013, told markets that his investment was “an all-in wager on the economic future of the United States.”<br /><br />Some of Buffet’s peers were dubious. Professor Bruce Greenwald, a noted value investor and academic, who The New York Times has described as “a guru to Wall Street’s gurus” said “It’s a crazy deal. It’s an insane deal”. Greenwald said he had run the numbers on BNSF at $75 and couldn’t make a deal stack up at that price, far less the $100 in cash and shares that Buffett paid.<br /><br />For his money, Buffett snared the US’s largest railway company, operating in the country’s west and mid-west.<br /><br />BNSF carries 90% of the coal from the Powder River Basin of Wyoming and Montana that keeps the lights on across much of the US. It’s also a substantial carrier of grain and fertiliser and containers of goods arriving at west coast ports from China and other exporting countries.<br /><br />In recent years, however, BNSF has been a prime beneficiary of the US’s shale gas fracking boom, a phenomenon probably not anticipated by Buffett. The company’s tracks sit astride areas like North Dakota’s Bakken formation which has seen a multi-billion dollar investment surge and explosion in gas and liquids output. With inadequate pipeline capacity in the area, oil companies have turned to railway companies like BNSF to shift their product to refineries.<br /><br />According to Bloomberg, BNSF has paid Berkshire Hathaway over US$15bn in dividends since 2009. BNSF, which employs around 43,000 people, reported 2013 revenues of US$22bn, up over 50% since Buffett purchased it. In the same period, its earnings have more than doubled to US$3.8bn.<br /><br />In fact, BNSF is currently a victim of its own success, unable to roll out enough track, locomotives and rail cars to service frustrated customers.<br /><br />According to the Wall Street Journal, electricity utilities country-wide are pressuring BNSF to speed up coal deliveries, with stocks at many power stations slipping under their preferred one month buffer.<br /><br />BNSF maintains it has invested US$5.5bn in 2014 on new facilities and equipment, including adding 500 locomotives to its fleet of 7,000, hiring 6,000 employees and adding 5,000 rail cars. Next year it plans to spend US$6bn.<br /><br />Despite this, power and coal producers and their lobby groups are fractious, asking regulators to mandate timetables for upgrades.</p>