Fabrice Taylor is a chartered financial analyst.
Officially anyway, Warren Buffett says buying Burlington Northern Santa Fe Corp. railway is "a bet on recovery." That doesn't seem to quite add up for Vox.
First of all, BNSF's all-time high stock price, set last year, is just north of $100 (U.S.), and it didn't stay there long, so paying a huge premium suggests something other than a bargain investment as the economy improves.
Second, this is not a typical Berkshire Hathaway investment for at least one reason (although Berkshire did own 23 per cent of the stock before the announcement). It's very capital-intensive and the railways, as an industry, don't earn great returns on that capital.
So, what is this a bet on? Some analysts think it's a bet, in part, on coal. The reasoning goes like this: Berkshire controls MidAmericanEnergy Holdings, a utility that consumes a lot of coal and BNSF ships a lot of coal, particularly from the Powder Basin. That coal is some of the best available in North America - plentiful, relatively clean and cheap to mine. By owning both the coal consumer and the coal shipper, the reasoning goes, you make more money. MidAmerican, it should be said, is keen to help BYD Auto, the Chinese company, and set up infrastructure to power its electric cars and share its battery technology. Berkshire owns a piece of BYD too.
Long-time Buffett watcher Ming Lam of Silver Heights Capital isn't buying it though. "That's not how Buffett thinks."
Mr. Lam believes this is vintage stuff from the aging investment legend (and he's put up some Buffett-like numbers himself recently: 34 per cent in the last year, pretty good especially considering a Berkshire-like cash weighting).
First, Mr. Buffett "gets a high degree of confidence knowing what the business will look like years from now. Who knows what RIM will look like in three years? I don't. But I know what rail will look like. If I don't know what it will look like, I don't know if it's expensive or cheap. Rail doesn't change unless they invent teleporters."
As Mr. Buffett told CNBC yesterday, "I basically believe this country will prosper and you'll have more people moving more goods 10 and 20 and 30 years from now, and the rails should benefit."
More specifically, Mr. Lam, who has owned BNSF in the past, points out that the railway is basically a monopoly on the lucrative Western U.S. transportation routes. Imports from and exports to Asia go through BNSF routes. The railway also ships huge amounts of food and, as mentioned, coal for domestic use.
"They own that gateway."
That's more like the Buffett style: a company with a real and durable competitive advantage. No one will build another railway to compete. In addition, the economics of rail have changed over the past decade. Small innovations have made them more efficient and demand grew faster than supply. Prices have held up, even risen in some cases, despite the weak economy.
There are other factors, one in particular: rising oil prices. Train transport per barrel of oil is way more economical than truck transport. It's also environmentally friendlier. That's one of the reasons Berkshire bought into this stock to begin with.
There may be another, less obvious but, in Mr. Lam's view, more important advantage to Berkshire in buying BNSF. Railways are capital intensive. They churn out a lot of cash but they also have to re-inject a lot of that money back into their business.
BNSF now has access to some very deep pockets to let it enhance its franchise, Mr. Lam says.
More importantly, the railway gets to leave behind the quarterly pressures of Wall Street. Imagine if someone told you "go build the best business you can for the long term. Don't worry about what the short-term market thinks you should do because you don't need their money any more."
As Mr. Lam says, "I don't think most people fully realize how many good long-term plans never get implemented because some companies need to maintain favour with Wall/Bay Street in the short-term."
Sadly, only Berkshire investors will benefit from this advantage BNSF now enjoys.