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Working on the Railroad


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Warren Buffett's big bet for the 21st century: trains.

By Annie Lowrey
Posted Monday, Feb. 28, 2011, at 6:19 PM ET
In 2010, with the U.S. economy still wounded and U.S. consumers still wary, cash-rich investors often looked west: All the big returns were in Singapore or Hong Kong or Silicon Valley, they said, so they put their money into hot social-media start-ups and emerging economies. But last year the world's most famous investor decided to stay very close to his base in flyover country. Warren Buffett doubled down on a 19th-century technology that runs right through his Nebraska hometown: trains.

In his annual shareholders letter, released over the weekend, Buffett explains his sheer delight over the success of an investment in the Burlington Northern Santa Fe Railway Company. Last year, Berkshire Hathaway paid $26.5 billion to buy up the 77.4 percent of BNSF it did not already own. The company runs freight trains in the western United States, and its corporate roots extend to the 1840s, before Nebraska was even a state. In his letter, Buffett says the purchase is "working out even better than I expected" and calls it the "highlight" of his year.

The purchase is in many ways vintage Buffett: BNSF is a big, well-managed, profitable company, if a deeply unsexy one—just the kind of overlooked, undervalued business he prefers. Still, is Buffett right? Are trains really a way to win the future? They might not seem so, with their clunking machinery and crumbling infrastructure. But even today—perhaps especially today—trains tend to be dramatic engines of growth.

Overall, the industry had a good year in 2010, as the shipping of goods increased with the economic recovery. Union Pacific, the country's biggest rail company, for instance, recently announced a 41 percent bump in fourth-quarter earnings and said it will hire thousands of workers to keep up with demand. BNSF made a healthy $3.6 billion on $15 billion in revenue last year, and contributed more than $1 billion in net earnings to Berkshire Hathaway last quarter alone. Buffett says it will increase Berkshire's earning power a whopping 30 percent, post-tax. "The economics of this transaction have turned out very well," he noted, high praise from the generally understated investor.

But the railroad's best prospects might be long-term, Buffett holds. "It's an all-in wager on the economic future of the United States," he said when the deal was announced. "I love these bets." For one, trains have the advantage of fuel efficiency. Last year, BNSF moved each ton of freight about 500 miles per single gallon of diesel fuel—or about three times more efficiently than long-haul trucks would have. Gas prices, of course, are on the rise—and the days of cheap gas are surely behind us. That gives the railways a big advantage.

Additionally, the railways are ripe for investment—investment Berkshire Hathaway can actually make. Today, the United States has half the usable track it had in 1970, though companies like BNSF are hauling much more freight than they did back then, and the American Association of Railroads estimates that freight loads will nearly double by 2035. That congestion—a signal of demand—means opportunity: Improve existing tracks and add new ones, and boost sales.

"Over time, the movement of goods in the United States will increase, and BNSF should get its full share of the gain," Buffett explains. "The railroad will need to invest massively to bring about this growth, but no one is better situated than Berkshire to supply the funds required. However slow the economy or chaotic the markets, our checks will clear."

Of course, Buffett was not the only big investor interested in pouring billions into trains in the past year. The Obama White House has attempted to boost funding for railways by more than $50 billion. (It also put BNSF's chief executive officer on its jobs council.) The argument is that though rail is expensive, it is worth it. The Millennium Institute, a group that supports sustainable development, recently tallied the estimated benefits of spending $250 billion to $500 billion to improve the nation's inter-city railways: Getting most long-haul trucks off the road, giving millions of Americans access to high-speed passenger rail, reducing oil consumption—and increasing GDP.

That sort of investment from the federal, state, or local governments is highly unlikely, to say the least. But where public officials won't step in, private investors like Buffett just might. "Our elephant gun has been reloaded," he writes in his letter. "And my trigger finger is itchy."

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Annie Lowrey reports on economics and business for Slate. Previously, she worked as a staff writer for the Washington Independent and on the editorial staffs of Foreign Policy and The New Yorker. Her e-mail is annie.lowrey@slate.com.
Article URL: http://www.slate.com/id/2286734/


Eric D. Schwerin
Rosemont Seneca Partners, LLC
1010 Wisconsin Ave., NW
Suite 705
Washington, DC 20007
(202) 333-1880
eschwerin@rosemontseneca.com
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