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Warren Buffett Just Stockpiled
63 Million Shares of this Stock |
Published:
February 18, 2008
Burlington
Northern Santa Fe (NYSE: BNI, $89.11) is the second-largest railroad
firm in the U.S.,
with a track network stretching some 32,000 miles through 28
U.S. states and two Canadian provinces. The company's network is
particularly strong in the western part of the U.S.
Warren Buffett's Berkshire Hathaway holds about a 20% stake in BNI
(more than 63 million shares). Buffett has made no
secret of his desire to purchase more of the stock.
Buffett has said that the poor performance of the railroad
industry in years past prejudiced him, and he was slow to realize
the value to be found in the industry. But he appears to have
changed his opinion quickly, buying up significant stakes in
railroads -- with Burlington by far the largest position.
When it comes to the U.S. railroad industry, barriers to entry
are high. Securing right of way and laying track is a very
expensive endeavor, as is finding workers and maintaining
tracks. As a result, there are really only four major long-haul
American railroad companies, and the danger of new entrants is
minimal.
The key to discerning competitive advantages between the major
railroad firms lies in the strategic location of their networks.
Specifically, BNI has the largest network of track in a region
of the western U.S. known as the Powder River Basin. The Powder
River Basin is found in states like Colorado and Wyoming, and it
is home to America's largest reserves of coal. Further
strengthening BNI's advantage is that the vast majority of this
coal is low in sulfur. With U.S. sulfur emissions standards
getting ever more stringent, many utilities are switching to
Powder River Basin coal to generate electricity.
Burlington Northern Santa Fe has picked up the lion's share of
the coal shipping market for the Powder River Basin. It would be
next-to-impossible for competitors to build an equivalent
network in the region. In short, BNI's economic moat is wide.
Another driver for BNI is that not only is it seeing rising
volumes but also rising prices. BNI is in the process of
gradually renegotiating contracts with companies that ship
across its lines. Due to high demand for shipping commodities
and tight U.S. railway capacity, BNI has been successful in
securing massive rate hikes. In addition, most new contracts
include clauses that allow BNI to recover much of its rising
diesel fuel expenses via fuel surcharges.
BNI still has a hefty debt burden, with a D/E ratio of more than
70%, but that burden is dropping as BNI uses some of its
tremendous free cash flow to pay down debt. And BNI looks
reasonably valued with a price-to-earnings-to-growth (PEG) ratio
of around 1.1 -- the stock trades at
13 times 2009
earnings estimates with a long-term growth rate of +14%.
Investors often avoid the rails during economic downturns, but
BNI's exposure to less cyclical business lines such as the
transport of coal and agricultural products is sheltering it
from the slowdown in the U.S. economy. All in all, investors may
wish to follow in the footsteps of the world's most famous
investor and scoop up some shares of BNI.
-- Paul Tracy
Editor
StreetAuthority
Market Advisor
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