In a roller–coaster market that’s desperately seeking a sign of what the future holds, it can’t hurt to peek into Warren Buffett’s crystal ball. And to the investment maven whose net worth tops $32 billion, there’s something about a freight train that’s magic enough to freeze out new recession fears. At a Fortune magazine conference last week, Buffett proclaimed that “as of today, the recovery is still under way.”
Why is Buffett so sure the U.S. economy has something left in the tank? Because he’s reading freight rail statistics like they were tea leaves. It’s no secret that Buffett loves railroads — his Berkshire Hathaway (NYSE:BRK.A, BRK.B) ponied up $34.5 billion to purchase Burlington Northern Santa Fe back in 2009.
Recent performance of the rail freight industry in general — and BNSF in particular — has bolstered Buffett’s confidence in the sector. “Our railroad carried 200,000 carloads last week — that’s the highest total in three years,” he said. “That’s stuff moving around the country, supplying merchants and doing all kinds of things.”
Don’t dismiss Buffet’s words as false confidence or a weak “preempt” bid in his favorite card game, contract bridge. Strong freight rail volume is the real-world equivalent of a “2 No-Trump” open — it measures fact rather than projections, since growth is tied directly to economic activity. The industry’s carload total for the week ended Oct. 1 hit 408,383 — 4.5% higher than the same week in 2010, according to the Association of American Railroads.
Those numbers reflect shipments of commodities like coal, as well as finished goods such as autos and consumer electronics. Freight railroads like Union Pacific (NYSE:UNP), CSX (NYSE:CSX), Norfolk Southern (NYSE:NSC) and Kansas City Southern (NYSE:KSU) also are benefiting from the spike in volume.
Since last Tuesday, when Buffett predicted Burlington Northern would post record profits this year, freight railroad shares have jumped. KSU rose 16% to $56.45, UNP was up 15% to $92, CSX gained 13.5% to $20.88 and NSC rose 12% to $67.45. BRK-B, which includes diversified insurance, finance, energy and other holdings, gained nearly 6% to $74.11 on the news. (BRK-A shares rose about 5% to $111,520).
Buffett predicted as much in his annual shareholder letter in February, writing that the deal “is working out even better than I expected.” He added that BNSF “will increase Berkshire’s normal earning power by nearly 40% pre-tax and by well over 30% after-tax.”
Here are five reasons why Warren Buffett is feeling the love for freight railroads:
- Railroads can move a ton of freight an average of 484 miles on a single gallon of fuel — and a freight train can carry the load of 280 trucks. Buffett loves the fact that rail freight is three times more efficient than trucks — and is greener to boot.
- Industrial production still is growing, albeit at a slower rate. That gives a boost to railroads’ intermodal shipping opportunity.
- Railroads appear to be gaining market share at the expense of trucking firms.
- Regulators have backed off requiring railroads to deploy expensive new anti-collision technology.
- Although some shippers have cried foul over high rates, freight railroads are too important to the economy to warrant heavy-handed treatment from government regulators. The White House last week even intervened in a labor dispute between the railroads and engineers to ward off a strike that could harm the economy.
Bottom Line: The Oracle of Omaha didn’t just luck into his legendary success — it was the product of patience, discipline and a focus on picking the right stocks (or buying the right companies) to deliver value. Snapping up BNSF two years ago is a move that will keep delivering value for years. And with some $50 billion in extra cash lying around, it stands to reason Buffett is looking for the next big target.
While Buffett’s moves are notoriously hard to predict, staking a claim on railroads like Union Pacific and Norfolk Southern would not be out of line given Buffett’s faith in the freight rail sector’s upside.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.