Warren Buffet holds approximately 6.5% of his portfolio in Burlington Northern Santa Fe (BNSF), the U.S. biggest railway based on 2006 EBITDA. Bill Gates’ foundation owns a little under 6% of the common shares of Canadian National Railway (CNR). Before the private equity bubble burst, a syndicate of institutions, including Goldman Sachs, contemplated purchasing Canadian Pacific Railways (CPR). Why are all these really rich people and institutions buying up, or contemplating buying, railways? Aren’t railways a relic of a by-gone era?
Not necessarily. The world is a funny place and what goes around comes around and railways are back for several reasons and have become, for some sophisticated investors, a good place to invest. As usual, what is good for some may not be suitable for you so, as per usual, please do your own due diligence before you consider investing in a railway stock.
By railway stock, I am speaking of what the Association of American Railroads classify as U.S. Class I Railroads- these are rail companies with operating revenue equal to or greater than $346.8 million (2006 figures) and include two Canadian railways (CNR and CPR) who, even counting only their U.S. operations, would nevertheless classify as Class I Railroads in and of themselves. In other words, Class I Railroads are the major players in the industry. There are publicly traded stock of smaller railways but I am focusing on the big ones that the Buffet’s and the Gates’ invest in. The Class I Railroads are in order of 2006 EBITDA (expressed in millions):
- BNSF (NYSE: BNI): $4,625
- Union Pacific (NYSE: UP): $4,121
- CNR (TSE: CNR): $3,680
- Norfolk Southern (NYSE: NSC) $3,318
- CSX Corp. (NYSE: CSX) $2,837
- CPR (TSE: CPR) $1,564
- Kansas City Southern (NYSE: KSU) $459 (KSU is so small, relative to its Class I Railroad counterparts, that it is often excluded when people speak of railway stock)
Why exactly are rich people buying the choo-choo train stocks?
- FEW COMPETITORS, HIGH BARRIERS OF ENTRY = PRICING POWER: Six major railways serve 300 million people in the United States (in practicality five since KSU is so small). Two major railways serve 30 million people in Canada with operations in the U.S. as well. These are not a lot of competitors serving a lot of people and the railways tend to have regional dominance rather than an all out free for all nationally. For example, Norfolk Southern is concentrated mostly in the north-east of the USA while BNSF serves mostly west of the Mississippi River. This means they have real market power on their home turf. It also costs a lot to become a major player in the industry- it is not easy to build track, labor costs are high, there are long established ship to train relationships etc. etc. This does not even count the regulatory barriers to enter the industry or buying a competitor.
