Tag Archives: alternative

In 2010, Warren Buffett’s Berkshire Hathaway acquired railroad Burlington Northern Santa Fe. This article looks at how that business has performed as compared to its large rail peers. While BNSF has proven itself to be a solid business, this doesn’t take away from the publicly available alternatives. If you were completing a modern-day monopoly board, the four U.S. railroads included would likely be Union Pacific (NYSE: UNP ), CSX Corp. (NYSE: CSX ), Norfolk Southern (NYSE: NSC ) and Burlington Northern Santa Fe. The first three are independently traded, public companies that I have reviewed in the past . Their collective investment performance over the last decade or so has been quite exceptional. On February 12th of 2010 Burlington Northern became of subsidiary of Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A ) (NYSE: BRK.B ), hence why it escaped the previous examination. Yet the company still provides independent annual reports , giving us the opportunity to explore Buffett’s railroad against the others. Here’s a look at the revenue generated by each company over the past eight years: Revenue ($b) 2007 2008 2009 2010 2011 2012 2013 2014 BNSF $15.61 $17.79 $13.85 $16.60 $19.23 $20.48 $21.55 $22.71 UNP $16.28 $17.97 $14.14 $16.97 $19.56 $20.93 $21.96 $23.99 CSX $10.03 $11.26 $9.04 $10.64 $11.74 $11.76 $12.03 $12.67 NSC $9.43 $10.61 $7.97 $9.52 $11.17 $11.04 $11.25 $11.62 Note that all numbers are in billions. From this view, you can see that all four companies are rather large and relatively comparable. Their respective footprints have been mapped out, and it’s a matter of working to improve each year. Union Pacific started the period as the largest company by revenue, followed by BNSF, CSX and Norfolk Southern. Incidentally, this is also how these four railroads ended the period. Here’s a look at the average compound growth of each company’s sales:   Revenue Growth BNSF 5.5% UNP 5.7% CSX 3.4% NSC 3.0% Thus far, in relation to past revenues and growth, Buffett’s BNSF most closely resembles Union Pacific. Next up we can look at operating income: Operating Income ($b) 2007 2008 2009 2010 2011 2012 2013 2014 BNSF $3.51 $3.90 $3.21 $4.46 $5.27 $5.96 $6.67 $6.99 UNP $3.38 $4.08 $3.39 $4.98 $5.72 $6.75 $7.45 $8.75 CSX $3.16 $3.62 $3.07 $3.07 $3.42 $3.46 $3.47 $3.61 NSC $2.59 $3.08 $1.96 $2.68 $3.21 $3.12 $3.26 $3.58 This table tells a similar tale. BNSF started with a slightly higher amount of operating income than Union Pacific, but ended the period in the same order as above. Here’s a look at the growth characteristics of operating income for each company:   Op Inc Growth BNSF 10.4% UNP 14.6% CSX 1.9% NSC 4.7% Note that these growth rates differ materially from revenue growth. As such, we know that the companies’ margins either progressed or contracted during the period. Indeed, this is what we observe: Operating Margin 2007 2008 2009 2010 2011 2012 2013 2014 BNSF 22.5% 21.9% 23.2% 26.9% 27.4% 29.1% 30.9% 30.8% UNP 20.7% 22.7% 24.0% 29.4% 29.3% 32.2% 33.9% 36.5% CSX 31.5% 32.1% 33.9% 28.9% 29.1% 29.4% 28.9% 28.5% NSC 27.4% 29.1% 24.6% 28.1% 28.8% 28.3% 29.0% 30.8% In the case of BNSF and Union Pacific you see drastically improved operating margins, from around 20% in 2007 to over 30% by 2014. Norfolk Southern also showed improvement, albeit not to as large of an extent. As such, these companies had operating income that greatly outpaced overall revenue growth. CSX, on the other hand, saw its operating margin decrease during the period, resulting in operating income growth that trailed overall revenue growth. A CSX advocate might see the numbers above and note that the company has showed great consistency, and now with the lowest margin, has the best opportunity for future improvements. An impartial viewer might suggest that Union Pacific certainly showed the most improvement, but doing so again would be a more formidable task. Here’s a look at net income over the years: Net Income ($b) 2007 2008 2009 2010 2011 2012 2013 2014 BNSF $2.20 $2.36 $2.01 $2.66 $3.27 $3.72 $4.27 $4.40 UNP $1.86 $2.34 $1.83 $2.78 $3.29 $3.94 $4.39 $5.18 CSX $1.34 $1.37 $1.15 $1.56 $1.82 $1.86 $1.86 $1.93 NSC $1.46 $1.72 $1.03 $1.50 $1.92 $1.74 $1.90 $1.99 This table should be especially appealing for those looking for conservative investments with staying power. During the throws of the recession, each company was still churning out over a billion dollars in profit on an annual basis. Naturally both revenues and income declined during this period – people tend to ship fewer things in lesser economic times – but not to a degree of high worry. If you can make billions of dollars in the worst of times, it follows that you’re setting yourself up well for the best of times. Here’s a look at each companies’ overall earnings growth:   Growth BNSF 10.4% UNP 15.8% CSX 5.4% NSC 4.5% Once more note that these numbers differ from overall revenue growth. In this case, each company showed earnings growth that outpaced total sales growth. As such, we know that the net profit margin improved during this time. Indeed, this is what we observe: Net Profit Margin 2007 2008 2009 2010 2011 2012 2013 2014 BNSF 14.1% 13.3% 14.5% 16.0% 17.0% 18.2% 19.8% 19.4% UNP 11.4% 13.0% 12.9% 16.4% 16.8% 18.8% 20.0% 21.6% CSX 13.3% 12.1% 12.7% 14.7% 15.5% 15.8% 15.5% 15.2% NSC 15.5% 16.2% 13.0% 15.7% 17.2% 15.8% 16.9% 17.2% BNSF, CSX and Norfolk Southern went from the low-to-mid tends to the upper-teens. Meanwhile, Union Pacific once more showed the greatest improvement: starting with the lowest margin and ending with the highest. In viewing the high level metrics and growth rates, Union Pacific showed its might throughout – even compared to Buffett’s BNSF. Which, incidentally, is likely a reasonable explanation as to why shares would have provided 20% annualized returns over the past decade. Yet that’s not to suggest that the other railroads haven’t been solid businesses and investments as well. Moderate revenue growth can turn into rather robust earnings-per-share growth due to the quality and nature of the business. Ideally you’d like to continue on to a per share analysis to get a better feel for shareholder growth and the underlying valuation – both of which can vary drastically from business performance. In the case of the publicly traded railroads, each has committed to reducing its share count and paying an increasing dividend. These items would enhance the results seen above, and allow shareholders to gain an even larger piece of the investment pie. But alas BNSF is now a subsidiary, which leaves our views at the business level. Naturally you don’t want to take your investment cues based solely on the actions of another person. Your goals and their goals could be vastly different. Just because Buffett likes a railroad doesn’t mean that you have to as well. Yet it can be instructive to think about the process. You can start to think about the industry, the consistent profits, the high barriers to entry, the monopoly-like enterprise, all of it. From there it can be useful to see if Buffett grabbed the best one. If so, you can still own a portion of it indirectly through Berkshire. If not, you can become a direct owner in another and start to build your own railroad empire. BNSF has indeed proven itself to be a profitable business with immense staying power. Yet this alone does not mean it’s the only or best choice. From a high level view, especially considering the shareholder rewards, the above publicly traded options appear to be just as compelling on a business level. The next step is determining a reasonable price to pay. Disclosure: I am/we are long BRK.B. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.