Friday, November 06, 2009

Rails ride high on media, analyst radar

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Tuesday’s announcement by Berkshire Hathaway, Inc. and Burlington Northern Santa Fe Corp., presaging the former’s full acquisition of the latter, drew widespread general media attention to the U.S. freight railroad sector as few stories have in recent times. Analyst comments were also in abundance. Both the New York Times and Wall Street Journal covered the story with front-page headlines. A sampling of the reporting and/or commentary follows.

Buffet Bets Big on the Future of Railroads. America's best-known investor, Warren E. Buffett, is making his biggest bet yet on the nation’s economic future by buying, of all things, a railroad.”

--The New York Times

“While this action has been widely viewed as a massive vote of confidence from one of the most respected investors of our time, we do not believe it will spark any further transactions in the rail space. More important, however, is the fact that we believe this could signal a more positive position for the rail industry in regards to pending legislation from capital hill. Indeed, we do not believe such an astute investor as Warren Buffett would have made his largest acquisition to date if he thought overreaching regulation was around the proverbial corner. . . . Berkshire Hathaway’s acquisition of BNSF brought to light the positive long-term prospects of the rail industry, while Union Pacific’s new agreement with Pacer and Norfolk Southern’s intermodal agreement with JB Hunt helped alleviate some of the concern about pricing pressures.”

--Dahlman Rose & Co. Director-Equity Research and Railway Age Contributing Editor Jason H. Seidl
 

“Christmas may have come early for Burlington Northern Santa Fe Corp. shareholders, but the company’s board came up short in extracting maximum value.”

--National Post

“Warren Buffett is finally taking his own advice. The billionaire wrote an op-ed piece for The New York Times in October 2008, urging readers to buy U.S. stocks. Oddly enough, though, Buffett continued to play it safe with the cash held by his own company.”

--Financial Post

 

"Is Warren Buffett’s $26 billion purchase of Burlington Northern Santa Fe railroad a bet on a 19th-century industry or the 21st-century economy? Neither, it seems—it’s the perfect hedge.”

--TrainSpotting

"Berkshire Hathaway Inc.’s $44 billion deal to buy Burlingon Northern Santa Fe Corp. is basically a huge bet on coal, a fuel that powers Warren Buffett’s power plants at his MidAmerican Energy utility and plays a major role in the railroad business.”

--MarketWatch

“[A] $100 price implies mid- to long-term operating profit growth of about 11.4% annually ... the market was pricing for roughly 8% EBIT growth. However, we do not believe that 3-5 year profit growth of 11% is unreasonable. ... This kind of profit growth potential (vs. what is reflectedin the stocks) is one of the reasons we have been bullish on the railroads.”

--Credit Suisse

“Seems to me that the bet that properly priced carbon will boost railroad freight doesn’t work so well when what the railroad happens to be carrying is a whole lot of coal. Maybe Buffett just likes playing with trains?”

--Andrew Leonard, Salon

“Isn’t it ironic that Buffett’s deal is sparking a lot of discussion about how railroads are an eco-friendly industry when much of Burlington Northern [Santa Fe’s] revenue comes from hauling coal? (The fossil fuel accounted for almost half the tonnage that the railroad hauled in the first nine months of the 2009). It is possible that carbon pricing would hurt not only truckers, but Buffett’s coal hauling railroad, too.”

--WSJ Deal Journal (blog)

“Montana political and agricultural leaders hope Berkshire Hathaway’s planned purchase of the Burlington Northern Santa Fe railroad will lead to lower shipping costs in Montana, but they doubt much will change. Gov. Brian Schweitzer, a farmer and rancher, said Tuesday he had spoken to both Warren Buffett, chairman of Berkshire Hathaway, and Matthew Rose, BNSF’s chairman, president and CEO. ‘I said to both of them that I look forward to working with both in the future to improve service and shipping costs for our farmers, our miners, and our merchants,’ Schweitzer said. U.S. Sens. Jon Tester and Max Baucus said they also are concerned about shipping rates for Montana farmers and other businesses."

--Associated Press

Railway Age Managing Editor Douglas John Bowen was asked Tuesday by National Public Radio whether Berkshire Hathaway’s purchase of BNSF was “a big bet; hasn’t the recession hurt shipping?” Replied Bowen, ‘If you believe the future of American freight transportation extends beyond overreliance on rubber-tired vehicles, rail is the way to go; Mr. Buffett seems to believe that's the case.”