Freight railroads are almost always near the top among all major U.S. industries. In addition to being crucial to the economic health and global competitiveness of the United States, they move 42 percent of our nation’s freight (coal, scrap iron, chemicals, and even orange juice, just to name a few). Railroads also serve to interconnect domestic businesses as well as communicate with overseas markets. Through investments, wages, purchases, and taxes, they contribute billions of dollars each year to the economy. From 1980 through 2003, Class I railroads (those with operating revenue of at least $272 million in 2002) spent more than $320 billion on capital expenditures and maintenance expenses alone. Non-Class I carriers spent billions of dollars more.
Recently, freight railroads have enjoyed resurgence after years of decline due to the boom in trucking that followed the expansion of the interstate highway system. Over the last ten years, while roadway congestion and rising fuel prices have restrained the trucking market, railroads have re-emerged as an incredibly stable and cost-efficient way by which to move the nation’s goods.
It might come as no surprise then that in February, billionaire Warren Buffett agreed to buy Burlington Northern Sante Fe Corporation in a $26.3 billion deal. The Class I railroad has a low price to book value, steady ROE, and is considered one of the best-managed railroads in the United States. This wager is possibly an expression of Buffet’s optimism about the long-term health of the American economy, but it could also serve as a foundation of financial stability for Warren Buffett’s eventual successor. Regardless, in times of growing fuel prices, bulk shipping costs are significantly lower than other modes of transportation. The railroad market itself features low competition levels and is poised for a large increase in profitability once the economy is running full steam. Despite where raw materials or finished goods are produced, an overwhelming majority of them get shipped via rail. Buffett himself noted that U.S. railroads are relatively immune to competitive pressures from low-wage overseas economies which have crippled other industries.
In addition to Buffett, billionaire George Soros has a diversified yet modest portfolio of railroad equities. Bill Gates is holding a substantial amount of Canadian National Railway between his Cascade Investments and foundation holdings. Both billionaires, George Soros and Bill Gates have significant investments of Berkshire Hathaway in their portfolios which will benefit from the purchase of Burlington Northern Santa Fe.