Buffet/BNSF

[MP173]

For those of you interested, Bloomberg Financial Radio had two hours of Warren Buffet last night.  It was quite informative and was broken into three segments:

 Hour1 - Tom Keene interview Donald Broughton of Avondale Securities (a transportation analyst) on Buffet's purchase of BNSF and the strength of the railroad industry today.  Very informative.

Hour 1, part 2 - Keene interviews Alice Shroeder, author of Snowball about Buffet and the emotional attachments Buffet has to railroading.  (note: Buffet has had a model railroad in his attic for four decades).

Hour 2 - a replay of the Charlie Rose/Warren Buffet interview from the weekend.  Buffet talks at length about the railroad industry, it's future, and his outlook on the US economy (long term bullish, however short term has plenty of challenges).

We have discussed the BH purchase of BNSF and rather than beat the subject to death, one might consider listening to the podcast of Keene's interviews with Broughton and Schroeder.

Go to Bloomberg.com and look under podcasts. 

ed

[Convicted One]

two thinks:

 

#1 By buying control of BNSF, Buffett has acquired a predominant player in it's own industry... in an industry with an extremely high barrier to entry (no one is going to go out and buy land and build a competing startup, it would cost too much) Giving him some control over who his competition is. If the rail industry thrives then his investment is safe and he will be in a commanding position in his industry.

#2  I believe that he has made an "all or nothing" wager. To wit: if the US Economy ultimately fails, then   his paper worth (prior to BNSF) would have evaporated anyway, so what he has really done is to put his money into hard assets (real estate and equipment) that will maintain relative value even if the current powers that be should fail. If america prospers then his investment will be secure. if america fails then he will have control of a valuable building block to use in whatever comes after

[Bob-Fryml]

Convicted one is right on the money with his "high barriers to entry" and "hard assets play" arguments.

But there's something beautiful about BNSF too.  With 96%+ of its Chicago-Los Angeles corridor already double tracked or its equivalent (with side-by-side subdivisions running current-of-traffic), completing the remaining short segments of single track will give this railroad a very significant boost in capacity in this very important corridor. 

Mr. Buffett has a well respected reputation of building for the future.  I'm sure Matthew Rose and his management team feel some sense of relief that they can now focus their energies on building real value into their railroad franchise rather than waste their energies fending off those pesky financial mosquitos that are always buzzing about quarter-to-quarter results.

Whenever the big "Transcon" project is finished, I'm sure there's a few bottlenecks on the Great Northern side of the railroad - particularly in western Montana, the Idaho panhandle, and northern Washington state - that could use some investment.  And I wouldn't be at all surprised if Mr. Buffett would "green light" those too.  God bless him!  

[MP173]

Convicted one:

It appears you analysis is dead on.  Buffet often speaks of "wide moats" and the BNSF could certainly fall into that category.  He mentioned in the interview with Charlie Rose there is little possibility that a competing line could be built.  Take a look at DME's expansion plans into PRB.  Is there much possibility that CP is going to follow thru with that?  It doesnt appear so. 

Further he stated that the bar has been lowered considerably during his investing career.  Back during his partnership days, he was looking for "home runs" and was capable of finding them.  With the huge amounts of $$$ that BH now has to invest, the opportunities are limited to larger more mature companies.  BNSF and utilities fit that profile.  He stated he is looking for a "fair return". 

ed

[CG-Rider]

Re; DM&E and the Powder River Basin.....

Here's a thing to be mindful of.

Buffet had made a play for CP mid '07 before the proverbial poo hit the fan...Of course, it all cooled down. But CP was in the process of , and subsequently wrapped up acquiring DM&E....thus giving it a tremendous toehold entry from the North into PRB. The planned building of a connecting extension INTO the PRB has recently been '' defferred'' by CP....But the great part of the asset value is all regulatory and protocol approvals have been granted,and ARE ALREADY IN PLACE, should CP revisit the project and move forward....

However, what CP can't do now, BNSF certainly could....and what a HUGE advantage this would give it over UP as regards PRB traffic....

Now, rewind to mid'07.......do we now perhaps see what Buffet was seeing in CP,   L O N G  term ???

One can visualize either BH or BNSF  making a push to acquire CP in the medium term future...and acquiring in the process a North entrence into PRB ( as well as access to 5 extra ports in NorthAmerica and a huge incease in its overall reach,traffic wise....but that's another story....)

Mr.Buffet has maybe got a few calls wrong in his carrer, but he's got WAY WAY more of them right.

His acquiring BNSF lock/stock&barrel, divesting himself of UP stocks :: he means business, short, medium and long term. ''Slowly enlarging '' his holdings in CP until the time is right to give it the last push over the top:  clever move in my opinion.....

cheers

(ahhh....the pleasure of armchair financial analyzing......)

[edited for content by selector]

 

[Convicted One]

Now, here's what I've been wondering.

 

Say 3-5 years down the road, BH trys to acquire control of Norfolk Southern.  what then?  Would the government allow it? And if they did would that be a good thing or a bad thing?

 

With control of both railroads one would think that the equity holder would be indifferent to forcing BNSF to short haul into KC and utilize NS thereafter towards the east, thus bypassing Chicago and it's inherent delays

[htgguy]

CG-Rider

Re; DM&E and the Powder River Basin.....

Here's a thing to be mindful of.

Buffet had made a play for CP mid '07 before the proverbial s**t hit the fan...Of course, it all cooled down. But CP was in the process of , and subsequently wrapped up acquiring DM&E....thus giving it a tremendous toehold entry from the North into PRB. The planned building of a connecting extension INTO the PRB has recently been '' defferred'' by CP....But the great part of the asset value is all regulatory and protocol approvals have been granted,and ARE ALREADY IN PLACE, should CP revisit the project and move forward....

However, what CP can't do now, BNSF certainly could....and what a HUGE advantage this would give it over UP as regards PRB traffic....

Now, rewind to mid'07.......do we now perhaps see what Buffet was seeing in CP,   L O N G  term ???

One can visualize either BH or BNSF  making a push to acquire CP in the medium term future...and acquiring in the process a North entrence into PRB ( as well as access to 5 extra ports in NorthAmerica and a huge incease in its overall reach,traffic wise....but that's another story....)

Mr.Buffet has maybe got a few calls wrong in his carrer, but he's got WAY WAY more of them right.

His acquiring BNSF lock/stock&barrel, divesting himself of UP stocks :: he means business, short, medium and long term. ''Slowly enlarging '' his holdings in CP until the time is right to give it the last push over the top:  clever move in my opinion.....

cheers

(ahhh....the pleasure of armchair financial analyzing......)

Rider:

I have a hard time seeing BNSF (or BRK) going after the CP. I think Mr. Buffet said he was done investing in rr's for the time being, and a couple of other factors enter in as well. First, my suspicion is that there would be quite an outcry from shippers who would see this as anti-competitive (North Dakota, I'm looking at you) and that the current political environment would make this tough to overcome.

Second, BNSF has a north entrance to the PRB now, all to itself. Perhaps the line from the east would be seen as a potential value, but it would cost huge dollars and given the recent discussion of the future of the PRB on this board and the lack of clarity of future coal demand due to possible cap and tax legislation, it's hard to see where a responsible investor would lay that much money on the line when the need for the service is so doubtful.

I'm not seeing it, but then again, I don't have a crystal ball.

Jim

[htgguy]

Convicted One

Now, here's what I've been wondering.

 

Say 3-5 years down the road, BH trys to acquire control of Norfolk Southern.  what then?  Would the government allow it? And if they did would that be a good thing or a bad thing?

 

With control of both railroads one would think that the equity holder would be indifferent to forcing BNSF to short haul into KC and utilize NS thereafter towards the east, thus bypassing Chicago and it's inherent delays

I have to ask, why would BRK want to buy NS? I don't believe it has been Mr. Buffet's pattern to buy various companies in an industry to merge them and make them more efficient. My reading of his shareholder letters says that he buys what he sees as companies that are fairly valued, with high barriers to competitors entering the market, and that have good management, and then allows that management continue to do what they have been doing to generate cash. Then, if they have a good place to invest that cash and it will generate an acceptable rate of return, he lets them pour it back into the enterprise.

I don't recall him being into merging companies to increase efficiency, which seems to seldom work anyway. Merging two railroads, given the recent track record (UP-SP and CR-NS-CSX) are things I think he would not walk, but run away from. I just don't think it's his style.

Plus, I don't think the political climate in the nation is receptive to this type of financial move at the present time. Even if you wanted to do it, you would pay such a high price in concessions and political favors that it would no longer be worthwhile.

How many mega-mergers have been a result of CEO egos? I think a large percentage. I also don't think that's a factor with Warren Buffet at the top of the food chain of your organization. His ego is stroked by making money, and good for him.

Jim

[nanaimo73]

CG-Rider

Buffet had made a play for CP mid '07 before the proverbial poo hit the fan...Of course, it all cooled down.

That was Brookfield Asset Management, wasn't it?
I can't remember Buffet being involved.

[Convicted One]

htgguy

Convicted One

Now, here's what I've been wondering.

 

Say 3-5 years down the road, BH trys to acquire control of Norfolk Southern.  what then?  Would the government allow it? And if they did would that be a good thing or a bad thing?

 

With control of both railroads one would think that the equity holder would be indifferent to forcing BNSF to short haul into KC and utilize NS thereafter towards the east, thus bypassing Chicago and it's inherent delays

I have to ask, why would BRK want to buy NS?

 

. My reading of his shareholder letters says that he buys what he sees as companies that are fairly valued, with high barriers to competitors entering the market, and that have good management, 

Jim

 

NS appears to clear all the hurdles you enumerate as his criteria, so (given that) why WOULDn't he buy NS?

additionally, it has been my experience that the mega wealthy seem to hold themselves in a paternal light in context with the health of our economy, so it's conceivable that that his ego might want to participate in grading our nation's road to recovery...so his mega wealth might make him uniquely qualified to effect the kind of efficiency improvements that only a man in his position can facilitate

[blownout cylinder]

nanaimo73

CG-Rider

Buffet had made a play for CP mid '07 before the proverbial poo hit the fan...Of course, it all cooled down.

That was Brookfield Asset Management, wasn't it?
I can't remember Buffet being involved.

I don't recall ever hearing Buffet mentioned in that situation. Brookfield yes, Buffet no.

[rrnut282]

Convicted One

Say 3-5 years down the road, BH trys to acquire control of Norfolk Southern.  what then?  Would the government allow it? And if they did would that be a good thing or a bad thing?

 

With control of both railroads one would think that the equity holder would be indifferent to forcing BNSF to short haul into KC and utilize NS thereafter towards the east, thus bypassing Chicago and it's inherent delays

Didn't he sell his NS stock to buy BNSF?  Why go to the trouble of selling the stock he already owns to smooth over the acquision review only to buy it back later (at, no doubt, a higher price)? 

[Convicted One]

rrnut282

  Why go to the trouble of selling the stock he already owns to smooth over the acquision review only to buy it back later (at, no doubt, a higher price)? 

 

LOL, some of you guys crack me up.

instead of addressing the question asked, no ...why not  (instead) try to twist things around into a debate about why the question  that WAS asked should not/need not be worth contemplation.

 

(humoring you) perhaps he had to free up some coin (selling the NS stock)  in order to pull off the BNSF acquisition, and (as presented in my question) AFTER A FEW YEARS to recover liquidity, he proceeds with step- two of this hypothetical master plan for rail dominance.

[rrnut282]

OK, I'll humor you.     

[Edit:  convicted one, I wasn't trying to "twist" things around, I thought I brought up a legitimate obstacle to your proposition that would have to be addressed before any action on your proposition could take place.  I wanted to get the horse before the cart before getting into the merits/downsides.  I apologize for my peevish opener.]

IMHO the answer to your query is, buying the NS to route traffic onto the former Wabash out of KC puts that traffic on a single track railroad.  By taking it to Chicago, traffic can flow onto the double track former Waterlevel Route, the former NKP, and the single track ex-Pennsy line NS has rights on.  That's a lot more options even with the time penalty of traversing Chicago.  Improvements in Chicago could be (but not likely) be started to aleviate that time penalty.  The Wabash would have to be double-tracked most of the way to handle any extra traffic as it was near or over capacity before the recession set in. 

Second, you raised the specter of government oversight.  I don't think anyone is ready for a true transcontinental railroad.  Shippers most likely would have a hissy fit in the office of their favorite senator or congressman crying about loss of competetition for their shipping business.  Upsetting the status quo between East and West (railroads) will no doubt garner more oversight than is warranted.  We all know what that could mean.

[htgguy]

Convicted One

htgguy

Convicted One

Now, here's what I've been wondering.

 

Say 3-5 years down the road, BH trys to acquire control of Norfolk Southern.  what then?  Would the government allow it? And if they did would that be a good thing or a bad thing?

 

With control of both railroads one would think that the equity holder would be indifferent to forcing BNSF to short haul into KC and utilize NS thereafter towards the east, thus bypassing Chicago and it's inherent delays

I have to ask, why would BRK want to buy NS?

 

. My reading of his shareholder letters says that he buys what he sees as companies that are fairly valued, with high barriers to competitors entering the market, and that have good management, 

Jim

 

NS appears to clear all the hurdles you enumerate as his criteria, so (given that) why WOULDn't he buy NS?

additionally, it has been my experience that the mega wealthy seem to hold themselves in a paternal light in context with the health of our economy, so it's conceivable that that his ego might want to participate in grading our nation's road to recovery...so his mega wealth might make him uniquely qualified to effect the kind of efficiency improvements that only a man in his position can facilitate

NS does not clear all the hurdles that I mentioned. In addition to the things you quoted above, I included a couple of other reasons that he is likely not interested in NS now. Perhaps you quit reading my post before you got to the part where I said "I don't recall him being into merging companies to increase efficiency, which seems to seldom work anyway. Merging two railroads, given the recent track record (UP-SP and CR-NS-CSX) are things I think he would not walk, but run away from. I just don't think it's his style." Or maybe you didn't catch the part where I said "Plus, I don't think the political climate in the nation is receptive to this type of financial move at the present time. Even if you wanted to do it, you would pay such a high price in concessions and political favors that it would no longer be worthwhile."

Those are some reasons he wouldn't (currently) have any interest in NS, even if it does meet other criteria he sets for investments. Also, there might be some differences in the long term market between BNSF and NS that sour a deal.

Seriously, you might want to read some of his annual shareholder letters. He comes across as anything but egotistical, and they are the only plain speaking I have ever read in any annual report. I've been very impressed by them and have gone back quite a few years reading them. My opinion is that they are helpful in understanding his motivations and make it more fun to try and predict what he may do, rather than just projecting what we may or may not think is right from our perspective onto him. The letters give the distinct impression that he wants to profit from the nations economic recovery more than he wants to "grade the road" to it.

In 5 years things will be different-how, I don't know. But right now I can't see him doing it. As a matter of fact, there is a strong possibility that in 5 years he will be dead. He'll be 80 next year.I guess we'll see.

Jim

[MP173]

Jim:

Nice summary of Buffet (make that Buffett).  Have you read Snowball by Alice Schroeder?  Your local library should have it.  It is a pretty in depth look at the man.

His annual reports are special to read.  They are online and contain a wealth of information. 

The other thread I am involved with now, on the Kansas City Southern, is a classic discussion of Buffett, actually Benjamin Graham valuations of securities.  Graham would have advocated the purchase of KSU at 53 cents on the dollar, but not at $1.40 price to book.

You probably nailed his reasons for not buying NS.  There is no need to and the returns wouldnt justify the investment and the headaches involved.  BH goes in for the quick kill.  The BNSF deal was considered and consummated within a few days.  Can you imagine the time and energy involved with buying NS into BH?  It would take YEARS. 

Now, if he wants to really vertically integrate, perhaps he will take a look at coal holdings.  Then he would have a natural flow from coal to railroad to energy utility.  The problem with coal would be the lack of a "wide moat".  too many competitors out there for coal to carry value, other than as a commodity.  Remember, Buffett likes to add value, or hold a franchise which has a natural advantage.

ed