Warren Buffett Goes “All in” on America… How to Play the Oracle’s Big Bet

by David Fessler, Energy and Infrastructure Expert
Thursday, November 5, 2009: Issue #1131

Last Sunday morning, I embarked on a spirited 60-mile bike ride with a few like-minded 50-somethings. Our route took us along the beautiful Delaware River. The Delaware – named after the Indian tribe that crossed its waters – defines the north-south border between New Jersey and my home state of Pennsylvania.

As we stopped to enjoy the view, we heard the unmistakable whistle of a steam locomotive. We looked up and there it was – New York, Susquehanna and Western’s number 142 – a steam locomotive pulling a line of cars along the Delaware.

One hundred years ago, engines like this – and the rails they ran on – were the backbone of the railroads. When it came to freight and passenger transportation in the United States, railroads were the only game in town.

Flash forward to this week. Warren Buffett – one of the most astute investors in the world – just placed a big bet. He’s gone “all in” on America’s future and bought a railroad company.

So what does this mean for the railroad industry – and what’s the best way to profit from it?

Warren Buffett: Railroad Bull

“Railroads can [move freight] in a very cost effective way, and they do it in an extraordinarily, environmentally friendly way.

“Burlington Northern Santa Fe last year moved a ton of goods 470 miles on one gallon of diesel. It releases far fewer pollutants into the atmosphere, saves enormously on energy consumption, and diminishes highway congestion.”

So said Warren Buffett in a CNBC interview after announcing that Berkshire Hathaway (NYSE: BRK.A) would pay $100 a share for the 75% of Burlington Northern Santa Fe Corporation (NYSE: BNI) that it didn’t already own.

Ever the optimist, Buffett said the decision to make the investment was easy:

“Rails last year moved more than 40% of all the ton-miles of goods in the country. They moved more than all those trucks… just the four big railroads. It’s a very effective way of moving goods.

“I believe that this country will prosper and you’ll have more people moving more goods 10, 20, 30 years from now and the rails should benefit. It’s a bet on the country, basically.”

So what makes those lumbering, seemingly endless freight trains so efficient? And are they really an attractive investment right now? Let’s take a closer look…

Rail Freight: From Bust to Boom

In the years after World War II, the advent of cheap fuel and a brand new interstate highway system led to the rise of “18-wheeler” trucks. As a result, the railroads fell out of favor and inefficiencies and waste abounded.

The situation became so grim for the railroad industry that in the 1980s, the ton-miles per gallon rate for freight transportation was one-tenth what it is today. Many carriers went broke. In the intervening decades, 40% of U.S. railroad track was abandoned. Much of it was ripped up and sold for its scrap value.

But what a difference a few years makes…

• With the reality of “Peak Oil,” the nation’s railroads now carry 43% of all freight – nearly 50% more than all the trucks on the road.
• Rail transportation is more than three times as efficient, too. For example, you can move one ton of freight an average of 400 miles on one gallon of diesel. Compare that to trucks, which move one ton a mere 130 miles on a gallon.
• Hauling capacity is relatively cheap, too. The average cost for a new freight car runs about $81,000 – roughly one-third the cost of a new tractor-trailer truck. And you can string as many as 150 of them together behind a few diesel locomotives, which just adds to the operating efficiency.
• Nearly all heavy industries need cheap, bulk delivery. And products from cars to coal are already served by rail. Plus, unlike trucks that have to negotiate city streets and narrow roads, rail lines go under and over them. And they always have the right-of-way.

What’s more… the bulk of the railroad infrastructure is already in place, without the need for much addition. The system has plenty of excess capacity and serves all major cities and towns across America.

According to the American Association of Railroads, there are about 24,000 locomotives and 460,000 freight cars in the United States. They move around on 140,695 miles of maintained track.

Ride the Rails to Profit With Berkshire Hathaway

Burlington Northern Santa Fe isn’t the only railroad that Berkshire Hathaway owns. It also has stakes in Union Pacific Corporation (NYSE: UNP) and Norfolk Southern Corporation (NYSE: NSC). Both stocks rose on the announcement – and both are up significantly since Buffett bought them.

So if you want to jump on board the railroad industry with Buffett, consider Norfolk Southern. Here’s why…

• The company’s 21,000 miles of rails touch nearly all heavy industries in 22 states.
• It serves every major container port in the eastern United States and provides excellent connections to western rail lines.
• Its Crescent Corridor project – an existing 2,500-mile rail network that supports the supply chain from Memphis and New Orleans to New Jersey – is undergoing a $500 million upgrade and expansion.
• Three new terminals will be built in Franklin County, PA, Memphis and Birmingham. Track improvements and additions will result in faster freight transportation, efficiency and reliability. And it’s estimated to generate 47,000 jobs in the five partner states.

In his CNBC interview, Warren Buffett commented that businesses we’ve not yet imagined, run by people not yet born, will continue to fuel the United States. And consequently, he expects rail tonnage to increase, with the railroad industry benefiting.

“America’s best years lie ahead. There’s no question about that,” Buffett told CNBC. And with his full purchase of Burlington Northern Santa Fe, he’s putting his money where his mouth is. The move is a bet on the United States, its citizens and the American spirit.

Nice going, Warren. We need more patriots like you and T. Boone Pickens.

Good investing,

David Fessler

Editor’s Note: David Fessler is The Oxford Club’s resident energy and infrastructure specialist. From oil, to wind, to solar, to electricity, he’s got his finger on the pulse of the latest developments, trends and moneymaking opportunities for investors.

What’s more, there’s a really neat story behind how David came to end up working with us. The life-changing story of a forgotten invitation that sat idle for a year until he stumbled across it again, acted upon it, and shared it with us over dinner at an investment conference. We encouraged him to share it with our readers – and here it is.

PR: wait… I: wait… L: wait… LD: wait… I: wait… wait… Rank: wait… Traffic: wait… Price: wait… C: wait…

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