by Tony Daltorio,
Investment U Research
We already knew that legendary investor Warren Buffett was bullish on the U.S. railroad industry through his holdings in Burlington Northern Santa Fe (NYSE: BNI) and others.
But his recent announcement that his Berkshire Hathaway (NYSE: BRK.A or BRK.B) firm will pay $100 per share for the 75% of BNI that it didn't already own, it proved that he's not only bullish on the railroads, but on America as a whole.
He confirmed that by stating that it was a "bet on the country."
Is the old fella a little crazy for paying $44 billion in a cash-and-shares deal – which included acquiring $10 billion of debt? Perhaps not.
While the railroad industry has struggled for a while now, that could all change in the years ahead, as highways grow more congested and environmental angst climbs.
Hit The Tracks and Go Green
Trains present a relatively easy alternative to those problems. They obviously don't have to worry about traffic jams and according to Burlington Northern, when they carry 100 tons over 1,000 miles, they produce 45% less pollution than trucks.
And you can trace Warren Buffett's thoughts on this all the way back to 2007: "As oil prices go up, higher diesel fuel raises costs for rails but it (also) raises costs for its competitors – trucker – roughly by a factor of four."
That factor alone could easily drive freight shipments from the road to the rails, not to mention how moving containers over long distances by train saves on labor, too.
The Berkshire-Burlington Deal – Buffett Style
At first glance, the Berkshire-Burlington deal looks just like a typical Buffett agreement.
- It highlights his affinity for profitable companies that don't rely on high technology.
- He's a well-known fan of established companies that pay out dividends, which he can then reinvest.
- With regard to Burlington, it has what Buffett calls a "moat" around it: a solid, defensible franchise that other companies can't breach.
In Burlington Northern's case, the "moat" is that nobody is going to try to build a new rail network across the United States anytime soon. That gives the firm a very tight grip on its business customers.
