Warren Buffet’s Railroad Buys
Recently Warren Buffett has been buying railroadcompanies. 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. {mosgoogle}
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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Norfolk Southern
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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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