Berkshire Hathaway now has 3 bets on 3 different railroads. What's going on here?
Recently Warren Buffett has been buying railroad
companies. It owns shares of Union
Pacific Corp., and Norfork Southern Corp..
Also Berkshire Hathaway has been buying call options for
Burlington Northern Santa Fe. And Buffett has stated that he was slow to
realize what a good investment railroads are because of the past poor
performance of the industry. But he now
says the railroads are healthier today than in past years, making them an
appealing investment.
This is still a little bit puzzling because the return on
equity of most of these railroad companies is pretty poor. For example, Warren Buffett’s yardstick for
performance is return on equity of 15% or greater. Many of these companies have
return on equity of less than 15% and have plenty of debt as well.
The performance of US railroad companies seems to be less
than that of its Canadian rivals. Canada
is rich in commodities, which require heavy transport. The US which uses railroads for manufacturing
has and using them less than in the past because of the off shoring of
manufacturing to outside of the US to places such as China.
It’s true that railroads are more fuel-efficient and
economical than trucks. However, for smaller companies trucks make more sense
and are often quicker.
Another interesting development is that Mexico will now be
able to drive the trucks straight from the Mexican border into the United
States. This means they can bypass trains entirely if necessary. This is currently only a trial test and not
widespread but if it goes well it will most likely open the doors to more Mexican
trucking companies.
Let’s have a look at some of these railroad stocks that Berkshire
Hathaway owns:
Union Pacific
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Profitability
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Profit Margin (ttm):
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10.97%
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Operating Margin (ttm):
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19.37%
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Management Effectiveness
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Return on Assets (ttm):
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5.23%
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Return on Equity (ttm):
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11.63%
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Income Statement
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Revenue (ttm):
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15.84B
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Revenue Per Share (ttm):
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58.732
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Qtrly Revenue Growth (yoy):
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3.10%
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Gross Profit (ttm):
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5.22B
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EBITDA (ttm):
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4.35B
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Net Income Avl to Common (ttm):
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1.74B
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Diluted EPS (ttm):
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6.38
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Qtrly Earnings Growth (yoy):
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14.40%
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Balance Sheet
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Total Cash (mrq):
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522.00M
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Total Cash Per Share (mrq):
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1.961
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Total Debt (mrq):
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7.24B
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Total Debt/Equity (mrq):
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0.469
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Current Ratio (mrq):
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0.725
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Book Value Per Share (mrq):
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57.976002
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Norfolk Southern
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Profitability
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Profit Margin (ttm):
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15.85%
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Operating Margin (ttm):
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27.40%
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Management Effectiveness
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Return on Assets (ttm):
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6.09%
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Return on Equity (ttm):
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14.90%
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Income Statement
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Revenue (ttm):
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9.34B
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Revenue Per Share (ttm):
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23.549
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Qtrly Revenue Growth (yoy):
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-0.60%
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Gross Profit (ttm):
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6.32B
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EBITDA (ttm):
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3.33B
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Net Income Avl to Common (ttm):
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1.47B
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Diluted EPS (ttm):
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3.658
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Qtrly Earnings Growth (yoy):
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5.10%
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Balance Sheet
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Total Cash (mrq):
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492.00M
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Total Cash Per Share (mrq):
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1.25
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Total Debt (mrq):
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6.16B
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Total Debt/Equity (mrq):
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0.622
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Current Ratio (mrq):
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0.986
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Book Value Per Share (mrq):
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25.183001
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Burlington Northern Santa Fe
Profitability
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Profit Margin (ttm):
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11.68%
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Operating Margin (ttm):
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22.22%
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Management Effectiveness
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Return on Assets (ttm):
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6.66%
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Return on Equity (ttm):
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17.31%
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Income Statement
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Revenue (ttm):
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15.31B
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Revenue Per Share (ttm):
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42.955
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Qtrly Revenue Growth (yoy):
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3.80%
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Gross Profit (ttm):
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9.41B
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EBITDA (ttm):
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4.58B
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Net Income Avl to Common (ttm):
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1.79B
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Diluted EPS (ttm):
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4.91
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Qtrly Earnings Growth (yoy):
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-8.10%
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Balance Sheet
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Total Cash (mrq):
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393.00M
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Total Cash Per Share (mrq):
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1.112
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Total Debt (mrq):
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7.97B
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Total Debt/Equity (mrq):
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0.747
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Current Ratio (mrq):
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0.697
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Book Value Per Share (mrq):
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30.191999
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These numbers are far from exciting. Without debt these
companies would most likely be producing less than 15% return on equity. Many of the stocks are also selling with a PE
of 15 or greater, so it seems far from cheap.
These companies are also capital-intensive something that
Warren Buffett generally doesn’t like. The rails don’t last forever, and many
are saying that railroads are now underfunded and in dire need of repair.
Of course barriers to entry are high, and we are unlikely to
see a new railroad anytime soon. And to
compete more with truck means more track has to be laid which is expensive.
The dividend yields of these companies range from 1-2%.
The great thing about these companies is that they are not
likely to fail. That meets Warren
Buffett’s number one rule, which is don’t lose money. They aren’t the most profitable, but they will
be around 20 or 30 years from now and there’s no doubt about that.
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