Mere pocket change for Mr. Buffet. But...
Conventional Wall Street wisdom currently says that the historical highs now enjoyed by railroad stocks make them subject to downward corrections, or worse, if the current down trend in loadings persist.
So either:
1. Warren Buffet sees an interesting view in his crystal ball.
2. He is a rail fan.
3. He is ticked off at some of his neighbors in Omaha.
4. All, some or none of the above.
"We have met the enemy and he is us." Pogo Possum "We have met the anemone... and he is Russ." Bucky Katt "Prediction is very difficult, especially if it's about the future." Niels Bohr, Nobel laureate in physics
Berkshire typically holds an investment over a very long time frame, and I would expect that to be the case here. In this case, they bought 10.9% of BNSF for $3.2 billion. That makes them BNSF's largest stockholder.
....I say for us little investors, {me included}, not all eggs in one basket....Mutual Funds.
Quentin
Modelcar wrote: ....I say for us little investors, {me included}, not all eggs in one basket....Mutual Funds.
I'm diverified in stocks-a billion here, a billion there, a few more billion spread around. I know it is risky, but if I am in bad need of money for groceries and gas, I can always sell off one of the mansions.
Jjohnieray wrote:If i had some loose coin,this is where i would invest it.Mr. Buffet knows his stuff.
Too late, the stock is already WAY up on the news...
LC
jeaton wrote: Mere pocket change for Mr. Buffet. But...Conventional Wall Street wisdom currently says that the historical highs now enjoyed by railroad stocks make them subject to downward corrections, or worse, if the current down trend in loadings persist.So either:1. Warren Buffet sees an interesting view in his crystal ball.
The conventional wisdom indeed suggests that the current business cycle should be entering a downturn relatively soon. Historically, business downturns always hit the transportation sector harder than other elements of the economy.
Historically, however, there has never been quite the network utilization for railroads as there is now. For whatever reasons, the industry has therefore never developed econometric models that correlate marginal costs with overall profitability as a function of congestion. The usual answer that you will get regarding marginal costs is that, with greater utilization of capacity, the marginal cost per unit of production will go down.
That is conventional manufacturing model theory. And historically, it was true for railroads.
However, at a certain point, the railroad cost curve diverges from the manufacturing model in key important details. To make a long and interesting story short, as utilization of capacity begins to recede, railroads should enjoy increasing profitability because the marginal costs of each unit of production will fall, rather than rise, with less business.
While that sounds counterintuitive, in fact it models out quite clearly using a standard capacity model with economic inputs. It is a natural result of efficiencies of operation that are gained in a network that is operated closer to its optimal, rather than physical, capacity.
And optimal capacity -- from the standpoint of profitability -- is a vastly different point than physical capacity.
Railroads have, wrongly I think, assumed that physical capacity meant economic efficiency, but the models show that it is far from it. If Buffett is looking at advanced econometric models, he would be seeing an ideal counterweight in the BNSF purchase to the normal effect on a stock portfolio of an economic downturn. The railroad industry is doing well, and BNSF is the best of the best in my book, and it will do much better when its network sheds some business and operates more closely to its economic optimum. That will happen either with 1) additional capacity, or 2) an economic downturn.
Investors pay close attention to business cycles. This cycle has had a long and strong run. But it is not typically the point in time to make large investments in general; rather the opposite -- take profits and get some cash. And notice that Berkshire Hathaway may be doing just that -- it has a very strong cash position at the moment. That fits with what an experienced investor would be doing at this point in the business cycle. The BNSF investment would be an anomoly -- unless Buffett thinks it makes sense because he sees something the industry itself does not see; that excess capacity, even a substantial amount of it, is a very good thing in a network and that the industry is just about to find out why.
A contrarian view no doubt, but the underlying model is so remarkably clear on the idea, the question may be better phrased as to why Buffett might be the first big investor to figure it out.
Oh, and I believe his son is a Wheat farmer ...
Warren Buffet bought stocks in other railroads too. Obviously, his percentage is low enough he doesn't have to disclose it.
Quote from CNN-money.
"Debbie Bosanek, assistant to billionaire Buffett, on Monday confirmed that Omaha, Nebraska-based Berkshire spent $700 million on one of the additional rail investments and slightly less on the other.
It was not immediately clear which other railroads Berkshire invested in. CNBC television earlier reported the investments, citing an interview with Buffett. He was not immediately available for another interview.
The Standard & Poor's 500 Railroads Index, which includes the four biggest U.S. railroads, rose as much as 7.2 percent to a record.
Buffett has made his name by investing in companies with strong management and businesses that he considers undervalued. It is common for shares of companies to rise when Berkshire discloses it has bought them."
If one wants to follow Buffets path, he can invest in Berkshire Hathaway or in certificates on the BH-stocks. With a little internet-search, one can find an opportunity.
Berkshire Hathaway is a very interesting company. That BH is now investing in railroads pretty much tells me they think the pricing power the railroads have had for the past few years is here to stay.
BTW...Howie Buffett was a corn farmer in Central Illinois, also owned a portion of GSI, a large manufacturer of grain bins...dont know if he is still doing both or not. Perhaps he does grow a little winter wheat, but generally that portion of Illinois is corn and soybeans, and with the corn prices at their levels this past winter, most of the acreage was targeted for corn. However...corn prices are falling.
Warren Buffett has traditionally only invested in companies with very strong economic moats, companies with strong economic franchises such as American Express, Coca Cola, Gillette (now Proctor/Gamble), etc. The past few years he has had difficulty finding satisfactory domestic opportunities and has turned overseas.
So, is this an investment in BNSF, or is this a play on the foreign manufacturing, primarily Asia?
As a sidenote...anyone here looking at the IPO for Blackstone Group? The private equity folks are sure making a lot of noise lately.
ed
He is already "giving" his money away, to things (Bill and Belinda Gates Foundation) he wants to be remembered by.
MP173 wrote: Berkshire Hathaway is a very interesting company. That BH is now investing in railroads pretty much tells me they think the pricing power the railroads have had for the past few years is here to stay.
"Pricing power" is, to me, an iffy investment tool. Businesses always look like they have pricing power at the top of a business cycle, and almost always seem to lose it in the downturns. This is typically more, rather than less, pronounced with capital intensive industries, even those with apparently impregnable captive markets.
I am skeptical of the assumption, partly because it is a term difficult to quantify. However, notwithstanding instances of contract negotiations at higher rates, I also note that more traffic is moving on railroads today (well, 2006) at lower R/VC rates than five years ago.
"Smithers, how is my New Haven stock performing?"
"Very well, Mr. Burns."
"And my Milwuakee Road, New York Central and New York Ontario and Western?"
"Outstanding, too, sir, If I may say so. And Rutland is soaring sir!"
"Yesss. Let those so called experts shoot their mouths off about Burlington or Union Pacific, I know where the bargains are. Oh, and up my stake in the Rock Island while you are at it."
TheS.P.caboose wrote:In talking about percentages, true Warren Buffet bought 10% of BNSF, also consider that Philip Anschutz, I believe, owns 51% of the Union Pacific.
Thanks to Chris / CopCarSS for my avatar.
That canny Scot, Andrew Carnegie, said put all of your eggs in one basket - and watch that basket carefully.
Dave
MichaelSol wrote:Historically, however, there has never been quite the network utilization for railroads as there is now. For whatever reasons, the industry has therefore never developed econometric models that correlate marginal costs with overall profitability as a function of congestion. The usual answer that you will get regarding marginal costs is that, with greater utilization of capacity, the marginal cost per unit of production will go down. That is conventional manufacturing model theory. And historically, it was true for railroads.However, at a certain point, the railroad cost curve diverges from the manufacturing model in key important details. To make a long and interesting story short, as utilization of capacity begins to recede, railroads should enjoy increasing profitability because the marginal costs of each unit of production will fall, rather than rise, with less business.While that sounds counterintuitive, in fact it models out quite clearly using a standard capacity model with economic inputs. It is a natural result of efficiencies of operation that are gained in a network that is operated closer to its optimal, rather than physical, capacity.And optimal capacity -- from the standpoint of profitability -- is a vastly different point than physical capacity.
Wow, Mr. Sol, you've thrown my limited understanding of economics for a real loop here.
The first two paragraphs quoted above I can well understand, but the third and fourth ones need further clarification.
Yes, for any segment of railroad there's a point of optimum utilization where a maximum amount of gross tonnage can be pushed through in each 24-hour period. On the double track CTC lines I'm familiar with, if the railroad runs trains with like characteristics [same maximum authorized speed and nearly the same horsepower per trailing ton ratio(HP/TT)] the trains will move in a fairly consistent and predictable manner.
Increasing the HP/TT of each train significantly will result in increased fuel and locomotive costs , but the productivity of the track segment in terms of ton-miles generated each day will increase as well. Under this scenario each train will be more costly to run, the revenue for each train won't increase, but if a few more trains can be handled across the entire railroad each day as a result, overall profitability should improve. Yes, the railroad is making less money per train; but with more trains moving, won't the total profit increase? I suppose we could call that the Wal-Mart way of doing business.
In mountain territory like the Union Pacific has across Wyoming and Utah and the BNSF has across New Mexico and Arizona, operating a mix of
is no way to run the railroad either.
If you have to be everything to everybody, smoothing out the HP/TT ratios for all trains strikes me as the most important step to really operating an economically efficient railroad.
I pointed this out one time during a one-on-one with an Executive V.P.O. and he responded with "Bob, we've already modeled what you've suggested in our computer and discovered that we could save $600,000,000/year in operating costs."
"So why aren't you doing it?" I responded.
"Because General Motors and United Parcel Service would never stand for their traffic being handled in 50-mph trains!" was his reply.
"But don't you see," I pointed out, "that you're having to run these 70-mph trains because they're constantly having to make up time due to being stuck - all too frequently and for far too long - behind a 40-mph bozo bow-wow pooch?"
This executive, who I admire greatly, smiled weakly with a knowing smile (he knew all too clearly what I was getting at), glanced at his watch, and politely retired to his business car.
- - - - - - - - - - - - - - - - - - - - -
Perhaps a little birdie landed on Mr. Buffett's shoulder and pointed out the explosion in capacity that's on the verge of happening once BNSF completes double tracking the remaining small segments of the Chicago - Los Angeles mainline. Freed of its greatest bottlenecks, the entire line is poised to benefit and the BNSF will be in an extraordinary position to complete for any business that moves two thirds or more of the way across the continent.
Union Pacific, on the other hand, won't begin to see such benefits for the markets it serves until
Both new capacity goals, alas, are years away.
jeaton wrote: Modelcar wrote: ....I say for us little investors, {me included}, not all eggs in one basket....Mutual Funds.I'm diverified in stocks-a billion here, a billion there, a few more billion spread around. I know it is risky, but if I am in bad need of money for groceries and gas, I can always sell off one of the mansions.
Here's another possibility based on some recent attempts at "investment influence".
Back in the 1990's, a certain tech billionaire (for the sake of anonymity we'll refer to him as "B. Gates". No wait, that's too obvious! Let's instead refer to him as "Bill G." ) bought a significant stake in a certain energy company. Shortly thereafter, the energy company brought in new management, changed it's name, became a diversified energy company with big bucks invested in high tech, and yadda yadda yadda a few years later nearly went belly-up from all this influence. FYI - the company is doing fine today, now that the 90's CEO was bought out.
Now, I'm not suggesting Mr. Buffet will try and do the same, but perhaps he sees an opportunity to make this company take advantage of profit maximization by excerting some control over it's business decisions.
We are all aware of the fact that a certain railroad is spending obscene amounts of money to add capacity to it's lower profit corridors while throwing nickel and dime expenditures at it's higher profit corridors. Perhaps Mr. Buffet is able to do what some of us wish we could do to/for this particular railroad!
Either that, or Mr. Buffet is also a disciple of Chairman Mao!
Dave:Buffett leaves the companies alone. He buys the management as much as the companies. Now, that is not to say he wont step in if necessary, as he did to clean up Solomon Bros in the early 90's, but generally his mission is to deploy the massive amount of cash the BH insurance companies generate in float.
BH's annual reports are on line and I would highly recommend reading of them. Be prepared as they are quite lengthy, but oh so entertaining and very educational.
One of BH's big errors was investing in USAir back in the 80's or 90's. Buffett learned from that experience that airlines have very little command over their capacity and hence their pricing. Is he making the same mistake with railroads? His overall track record has been outstanding. As a disciple of Graham he seeks out value. Time will tell.
MP173 is right, Buffet is basically a passive investor, and usually for the long term. And of all the major industry in the US, I think outside interference with the management of a Class 1 Railroad would likely be a disaster for all concerned.
Northtowne
Bob-Fryml wrote: ..... but if a few more trains can be handled across the entire railroad each day as a result, overall profitability should improve.
No.
Yes, the railroad is making less money per train; but with more trains moving, won't the total profit increase?
Yes.
Profitability is the measure of efficiency in use of resources. An operation earning $50 on $500 of revenue earns 10% profit. An operation earning $75 on $1000 of revenue earns 7.5% profit.
The first is more profitable, but earns less profit. The second earns more total profit, but is less profitable.
More profit requires consuming in that instance twice the resources to achieve lower profitability. The sensitivity to cost changes increases significantly. An 8% change in an input cost reduces the profitability in the first instance to 2%. In the second instance, the profitability is destroyed entirely and a loss is incurred, even though it had more profit initially.
The Beta, or risk factor, is significantly higher for the railroad earning more profit, when it does so at the sacrifice of profitability.
This is why profitability is a key financial ratio, whereas profit is just a number.
Bob-Fryml wrote: Perhaps a little birdie landed on Mr. Buffett's shoulder and pointed out the explosion in capacity that's on the verge of happening once BNSF completes double tracking the remaining small segments of the Chicago - Los Angeles mainline. Freed of its greatest bottlenecks, the entire line is poised to benefit and the BNSF will be in an extraordinary position to complete for any business that moves two thirds or more of the way across the continent.
Well, the old argument used to be that capacity caused prices to fall, and constrained capacity caused prices to rise. Now, with a hugely expensive capacity expansion, coming fully available at just about the time as traffic should begin to decline as a result of the normally expected business cycle, doesn't this particular scenario suggest that something different would happen? The idea of "an extraordinary position to compete" is suggestive to me .... even as costs of operation and paying off the new investment will necessarily be higher ... compelling the need to get the business ... compelling the usual cost-cutting to fill the lanes ....
This angle just doesn't fit too well, if the premise is that Buffett is taking into account the downside of a business cycle, which judging by the BH cash position, suggests that he is ....
While profitablity is important, in the case you provided it really has very little meaning. More important is the return on equity or the return on invested capital, or possibly even return on assets. Each provides a snapshot, as does the profitability margin, when all are combined along with a number of other ratios, one can truly get an understanding of a business.
Return on Equity (ROE) is in my opinion considerably more important than profitability margin. That truly measures the ability of a company to utilized invested equity and retained earnings.
ROE utilizes net margins, asset turnover, and financial leverage to determine the number. It allows an analyst to compare companies of various sizes for efficiency of investment.
BNSF's ROE was around 18% last year...not bad for an asset intensive company.
MP173 wrote: While profitablity is important, in the case you provided it really has very little meaning. More important is the return on equity or the return on invested capital, or possibly even return on assets. Each provides a snapshot, as does the profitability margin, when all are combined along with a number of other ratios, one can truly get an understanding of a business.
If you don't give any credence to the risk function; then true, it has little meaning with regard to ROE. However, the higher risk is a risk directly to ROE. Profitability is a surrogate measure of that risk.
And while I tend to agree about the importance of ROE, that is a different discussion. In the case of declining marginal costs with reduced traffic, ROE is preserved in a fashion if that happens -- and the profitability is the most direct way of measuring that, because the marginal cost improvement is, well, a cost function, not an equity function.
BNSF's historic cost elasticity is typically around .57 to .62. Both profitability and ROE go to hell in a handbasket prettty quickly in a business cycle downturn with those numbers. I think that elasticity is considerably higher these days, which means it will shed costs more quickly in a downturn than it would have been able to in the past -- which is good, but which is also the direct result of higher marginal costs of operation of a congested system.
What does that do to ROE? Depends. ROE can be a complete phantom -- enough debt can reduce the equity to the point that just about any positive rate of return makes the ROE look great -- at the sacrifice of a sustainable debt to equity ratio.
Want a good ROE? Borrow money. Good policy? Only if it improves the rate of return -- the profitability -- because the debt is used to increase the efficiency of the operation by appropriate investment. How would you measure the effectiveness of that debt investment? Profitability! Using debt to artificially increase the ROE by buying back shares and reducing the actual equity -- substituting debt -- is another discussion altogether, but is a reminder that not all high ROE is good for the company.
ROE is never, ever a substitute for a profitability or return on sales measure, because ROE is, or can be, a creature of debt, and more debt can make ROE look terrific.
For a while.
Profitability remains the measure of choice for management performance and company strengths, not the least in part because it measures risk better than ROE, which doesn't measure it at all -- indeed, it can be an inverse measure of risk.
Again, this is in the context of why is Buffett doing this now? As opposed to when the stock was half the price, and the capacity expansion was already underway, with all of its presumed advantages?
My thought is that it is because he sees improving profitability in a business downturn, and is willing to buy -- as Jay points out above -- at a point when the typical sophisticated investor sees the stock at a natural peak subject to a correction.
And ordinarily, for railroads, a business downturn is always an unhappy "correction" unless someone like Buffett sees something very different at this particular point in time, providing a sufficient enough reason to take the historical risk that a railroad stock would historically present at this point in the business cycle.
Michael:Several points here.
1. Explain your comments on risk and profitability. I have read them several times and rather than comment on it, I ask for clarification.
2. I dont agree with you on the premise of increased profitability in a downturn. I dont disagree, I just dont agree...yet. Perhaps we will have to see what happens when we do have a downturn. Dont know if BNSF is in that downturn, I think the rails are, as are most of the transports. 1Q reports will be out later this month.
3. I agree with your comments regarding debt and ROE. No doubt part of the big movement by Private Equity firms now is to transfer equity to debt. Will the loadup on debt yield high returns for the PE firms? Time will tell. I would not want to be holding previously issued corporate debt for firms that just went private and loaded up on debt. Their Moody's ratings are already being affected.
4. We have discussed previously the BNSF's purchase of stock while issuing more debt to fund the capacity issues. I dont necessarily agree with that move, but perhaps the MBA laptop nation knows better.
5. I do not think Buffett purchased BNSF and others due to the increased profit margins during the downturn. I think he purchased it solely on the belief that it will be a wise investment. Many books have been written on Buffett's methodology and I have read several. Basically Buffett's investing philosophy boils down to this. Determine the value of a business and then buy only when that business is selling at a significant discount to it's value (The Warren Buffett Way, Robert G. Hagstrom, pp 122). Buffett has made a determination that BNSF was under valued and made a significant purchase. He also believes that BNSF is a better investment at the time he purchased it than other companies he owns (either outright or in major stock holdings). Based on his tenet of buying and holding for the long run, he believes BNSF is a value. I would believe that is because of future earnings rather than a downturn in business. After all, the downturn in business will at some point turn around.
MP173 wrote: 1. Explain your comments on risk and profitability. I have read them several times and rather than comment on it, I ask for clarification.
Looking at the example.
RR # 1. Operating expenses of $500 earns $50 profit, 10% rate of return on sales.
RR #2. Operating expenses of $1,000, earns $75 profit, 7.5% rate of return on sales.
RR # 1 is more profitable. RR #2 earns more profit.
Suppose each RR has $500 of equity capital invested. ROE RR# 1 is 10%, 10% return on sales. ROE RR# 2 is 15.0%, 7.5% return on sales.
As shown in the earlier post above, RR #2 has a greater risk of loss.
Here's why, and particularly regarding that part of the picture that most often reflects any given ROE: debt. ROE can be purchased. It has nothing to do with the performance of the company. You don't like the 15% ROE for RR #2, let's increase it.
RR # 2 decides to increase its ROE, to increase its stock price, say, because its officers have some option shares, and would like to maximize their returns. The RR decides to purchase $250 of equity, creating a RR capitalized at $250 equity and $250 debt. That's great if you are selling your option shares to the company; $250 goes to those shares.
But the following year, RR # 2 incurs interest charges of $25 because of its 50/50 debt to equity ratio (at 10% interest). Costs increase to $1025, and profit drops from $75 to $50, profitability drops to 4.9% return on sales, even though its ROE is now 20%.
RR #2 is earning the identical "profit" of $50 now as RR # 1; it has purchased a substantial increase in ROE, but RR # 1 still generates a 10% rate of return on sales; RR #2's profitability has declined from 7.5% to 4.9%.
Is the company, RR # 2, stronger or weaker than it was before?
ROE suggests it is stronger; profitability suggests it is weaker. Which is more accurate?
Now, this is where the "risk" factor comes in.
Both railroads are subject to the same environmental factors -- general economic conditions beyond the control of management. RR #2 earned more "profit" than RR #1, decided to take some of that profit and purchase shares, and now has a positively glowing ROE, even with reduced income because of added debt.
But, its profitability has been lower, because it's management manages poorly compared to RR #1 and we know that from the "profitability" measure. The profitability metric measures the risk. Notwthstanding its higher profits and higher ROE, its lower profitability measures the ability of that management and provides the most accurate comparison of the two managements. Here's the risk:
A price increase in supplies increases costs by 5%, and the market does not permit the costs to be passed through.
RR # 1's operating costs are now $525, RR # 2's costs are $1,075 ($1050 + $25 interest for debt). RR # 1's profit drops from $50 to $25, it has a 5% return on sales, and its ROE drops from 10% to 5%. RR #2 profits drop from $50 to $0. It's rate of return on sales is 0%, and it's ROE drops from 20% to 0%.
RR #2 has no profit, nothing to re-invest in the company, nothing to hand out in dividends. It will have to borrow again to satisfy one or more of those needs. It's costs will be accordingly higher the next year because of that.
RR # 2 has gone from a 20% ROE to 0% ROE, while RR #1 went from 10% ROE to 5% ROE, and retains profits to re-invest and or pass through in dividends. It will have no additional costs to contend with next year.
That is why RR #2, with the higher ROE, represented the greater risk, when measured by the profitability metric, because RR #2 was, ultimately a less profitable company, and ROE actually was an inverse indicator of that weakness. That is, ultimately, the "profitability" of 10% compared to 7.5% was far more important in gauging the relative strength of these two companies than either the total profit ($50 vs $75) or the ROE (10% vs 15%), and particularly when assessed against the process by which ROE is typically improved - substituting debt for equity.
Wow! Quite a bit of thinking in this thread! Intersting stuff.
I must say I was pleased when I looked at our portfolios yesterday morning and saw my Burlington Northern Santa Fe stock price. I think the big railroads are still good investments for the long run. Even after the increased price yeserday, BNI's P/E is still at a comfortable level. Also, I'm convinced that railroads will continue taking market share from trucking in the years ahead due to fuel efficiencies.
GARRY
HEARTLAND DIVISION, CB&Q RR
EVERYWHERE LOST; WE HUSTLE OUR CABOOSE FOR YOU
MP173 wrote: 5. I do not think Buffett purchased BNSF and others due to the increased profit margins during the downturn. I think he purchased it solely on the belief that it will be a wise investment. Many books have been written on Buffett's methodology and I have read several. Basically Buffett's investing philosophy boils down to this. Determine the value of a business and then buy only when that business is selling at a significant discount to it's value (The Warren Buffett Way, Robert G. Hagstrom, pp 122). Buffett has made a determination that BNSF was under valued and made a significant purchase. He also believes that BNSF is a better investment at the time he purchased it than other companies he owns (either outright or in major stock holdings). Based on his tenet of buying and holding for the long run, he believes BNSF is a value. I would believe that is because of future earnings rather than a downturn in business. After all, the downturn in business will at some point turn around.
Well, it is certainly interesting. It seems like buying at the bottom of a business cycle represents the opportunity, rather than at the top of a business cycle. BH has a ton of cash -- that is the normal business cycle strategy when an investor thinks the cycle is about to break -- to be able to maximize value by cashing out at the top, and then to have the cash to buy stocks in good companies when they are cheap again. Something else is going on here...
OK here's why I think Buffet bought into BNSF.
1) The railroad serves the Powder River Basin and there is no end in sight.
2) The railroad serves every major Pacific port in the US and it rolls long trains of containers a long way. And there is no end in sight.
3) The railroad has increased its capacity in the right places so it can grow.
Its become a money machine.
Here's not the reason Buffet bought into BNSF.
1) Business is going to decline. It might go down short term, but Buffet isn't a short term guy.
I see your point and have to agree that any assumption of debt on a balance sheet will in fact add to risk of the company. In fact any investment other than treasuries will incur risk (US Treasuries are deemed a risk free investment).
Risk is not a bad thing. In fact it a determining factor on the return of an investment. The proper capital structure is a never ending debate not only within a company, but also within families (check out the default rates on sub prime mortgages these days!).
Railroad #2 is more typical in the industry. Most railroads have about a 50% debt to equity ratio. I will check on this tomorrow when I have more time and report back with the class 1's. Due to the capital intensive nature of the industry, often sales/assets are only about .5, so a leveraged capital structure is necessary to attract capital.
Both Railroad 1 and 2 seem to have a much higher sales/asset ratio (we havent included current assets and liabilities in the mix, so we really dont know what the amount of assets are).
It would be interesting to check your theory in the real world of railroading, but I know of no rails with no debt.
I will agree tho that Railroad 2 carries more risk...more on this tomorrow as I am exhausted.
MP173 wrote: Risk is not a bad thing.
Risk is not a bad thing.
Risk is the price of reward, although profitability also measures management quality, whereas I don't think ROE does.
The example is solely to illustrate the risk. In the real world there a well-defined formulations of debt to equity ratios that maximize return and minimize risk, and the example was not designed to suggest that no debt is a perfect condition; but rather simplified the presentation of relative conditions by using one as a zero condition -- zero offering an easier relative conceptualization than, say "corporation # 1 has $3.2 billion in debt, while # 2 has $4.6 billion in debt ...".
Michael:After a solid 8 hours of sleep I went back and re-read the past few posts. I agree with your statement on risk. We both know what that leverage on rr#2 would produce if the volume was increasing....so there is no need to hash and rehash it.
Greyhound, I think you pretty much summarized it pretty well. BNSF seems to be sitting in a pretty good spot right now, when compared to the other railroads. It can be said that BNSF is much more of a play on both Asia and energy than UP. Plus throw in their sizeable grain business, which has suddenly become another play on energy, and you have a company poised to grow and increase margins.
Now, I wonder which other rails BH purchased?
I spent the last hour putting together a spreadsheet on class 1 data.
From a financial view, NS makes sense, but a more compelling case could be made for CN. Their returns on assets and equities pretty are better than NS and were better in 04 and 05 than BNSF.
2004 2005 2006
CN return on assets 5.2 6.8 unavailable
NS return on assets 3.7 5.0 5.1
BNSF return on assets 2.7 5.1 6.0
CN ROE 12.5 16.3 ua
NS ROE 11.6 13.8 13.5
BNSF ROE 8.5 16.1 18.2
CN Operating margin 33.1 36.2 ua
NS Operating margin 23.3 24.8 27.2
BNSF Operating margin 15.4 22.5 23.5
From a valuation standpoint tho, CN is a stretch. It currently has a market cap of over $50 billion on revenues of $6 billion. It seems overvalued at this time. BNSF's market cap is $31billion with $15 billion in revenues and NS is $21billion market cap with $9 billion in revenue. However...I am not sure if CN's marketcap and revenue is $C or US. Will check on it.
If the final round of mergers did occur...and I doubt it will, a combination of BNSF,NS, and CN would be extremely effecient, provided they could all get along (a big if).
One other interesting piece of info...employees per mile. BNSF has 1.14, UP has 1.4, NS has 1.35, CSX a whopping 1.70, CN has 1.14 and CP has 1.15. Granted that is not necessarily a great indicator, as traffic density would be a factor and the Canadian lines do not seem to have the density (nor the revenue per mile) as the US carriers, but CSX and UP seem a bit out of line.
edbenton wrote: They have some major plusses for them 1 Shortest L.A to Chicago route the former SF transcon. 2 the Powder river need I say more. 3 All the grain they haul with all the ethanol and biodiesel palnts being built here in the midwest grain shipping will be needed. 4 Strong leadership that right ther is the key.
Didn't these plusses exist, in substantial part, several years ago? From the standpoint of these plusses, wouldn't it have made sense to buy them at 35 -- if indeed these factors are the motive -- rather than wait until 85?
I mean, the reasons offered on this thread strike me as raising more questions than answers. Warren Buffett just figured out that BNSF serves the Powder River Basin? That it has a line from Chicago to LA? The Sage of Omaha just now looked at a map and discovered that "the railroad serves every major Pacific port in the US and it rolls long trains of containers a long way"?
I don't think he got where he is by being the last guy on the block to notice the obvious. Something else is driving this.
Energy and manufacturing are driving this.
Energy pricing will fluxuate, but the manufacturing has changed dramatically. He understands that. Go back to the original Berkshire Hathaway company. It was a New England textile manufacturer with assets but a declining market. He bought it and used the assets to move forward.
To think that the energy pricing is only going to go up is dangerous. We go thru these trends about every 10 - 15 years, but the manufacturing has left. It has to be transported. There are only so many methods of doing that.
Remember that BH is involved in transportation. They own XTRA Lease.
MP173 wrote: Energy and manufacturing are driving this.Energy pricing will fluxuate, but the manufacturing has changed dramatically. He understands that.
Energy pricing will fluxuate, but the manufacturing has changed dramatically. He understands that.
Well, he didn't just get the revelation on those items last week, when BNSF stock was at all time high.
And if he did just get that revelation last week .... well, ...
I repeat, the "obvious" is not an explanation, because they were just as "obvious" two years ago, four years ago, take your pick, when the stock was a lot cheaper.
If he had announced last week that he was buying BNSF because he just discovered that energy prices are going to change, and that manufacturing has changed dramatically, or that he just looked at a map and discovered that the BNSF served West Coast ports, and that he didn't know that before, I think people would have started to worry about Warren ...
Buffett didn't get his reputation by being the last guy on the block to notice the obvious.
MichaelSol wrote: I don't think he got where he is by being the last guy on the block to notice the obvious. Something else is driving this.
We dont know when he started buying adn at what price....do we? I havent really checked into this other than reading on this forum. Do we know how many shares and total price paid for an average cost per share?
I will see if I can find it.
Murphy Siding wrote: What would you think is driving this?
Warren Buffett quote: - "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Wasn't Berkshire one of the companies that bought part of EMD?
MP173 wrote: We dont know when he started buying adn at what price....do we? I havent really checked into this other than reading on this forum. Do we know how many shares and total price paid for an average cost per share? I will see if I can find it.ed
Just a guess, but I imagine that last year, when BNSF was trending down, got to below 60, then started its current strong move upward.
BH made it's last purchases on April 4th and 5th to push it over 10% holdings and triggered the filings:
4-4-07 417,900 shares @ $81.81
4-4-07 10,000 shares @ $81.72
4-5-07 1,219,000 shares @ $81.18
The total shares held by BH's three insurance subsidiaries (National Indemnity, National Fire and Marine, and Columbia Insurance) totals 39,027,000.
Looking at the price history, BNSF said goodbye to the $60's in late September and moved around quite a bit in the $70's, closing above $80 on October 16th. Since the first of the year it has been moving very very steadily from the $73 range up to the low to mid $80's before the announcement.
BH has been accumulating for awhile and has been very steady since the first of the year, probably earlier than that.
edbenton wrote:Hathaway is a 50% owner of EMD so maybe more SD 70ACe's are in the future and also maybe some straight SD70M-2 also. Hey you have to keep your largest shareholder happy right.
Well, that was my thought. Any substantial order for locos, is HUGE money. So, by placing himself on both ends of such a transaction, he pretty much gets to write his own ticket. Plus take any gain on the ownership of the BNSF stock that would happen regardless.
Not the same company, EMD is part owned by Berkshire Partners. Look at their website.
Berkshire Partners
Murphy Siding wrote: MichaelSol wrote: I don't think he got where he is by being the last guy on the block to notice the obvious. Something else is driving this. What would you think is driving this?
Well, looking at BH's cash position over the last decade, there is an interesting pattern. They seem to have been pretty heavily invested at the time of the dotcom boom, and then began to convert to cash 3-4 years ago. Now, going into cash before the stock market really takes off is not exactly good timing. You miss the appreciation in stock that presumably was the reason you bought stock in the first place.
Then, his vaunted position in Coca Cola occurred during a time when Coke began to crumble -- it's historic primacy over Pepsico disintegrated -- Pepsico is now the king of the hill, and Buffett resigned from the Coca Cola board -- one of the few he took an active role in. Good call, bad call?
Then, to be sitting on piles and piles of cash for three years or more, while interest rates are at historic lows is also not exactly "textbook" portfolio management; all the while watching good companies throw off cash and stock appreciation right and left.
Then to move on railroad stock at a historic high at a point in time when it actually makes sense to move into cash, according to Buffett's own past track record -- well, it all amounts to an interesting spectacle. We are coming to the end of a business cycle. But, we are not there yet. There would be plenty of time and opportunity to buy good railroad stock at lower prices. No need to get in a rush, at this particular point in time. And there was plenty of time to buy this stock earlier -- at far lower prices.
That huge cash pile meant Buffett expected something much earlier, and it obviously didn't happen. Oh well, no one cries when they still have $40 billion in the bank. But, he's moving very little into stocks -- the railroad play is a drop in the bucket.
MichaelSol wrote: Bob-Fryml wrote: Perhaps a little birdie landed on Mr. Buffett's shoulder and pointed out the explosion in capacity that's on the verge of happening once BNSF completes double tracking the remaining small segments of the Chicago - Los Angeles mainline. Freed of its greatest bottlenecks, the entire line is poised to benefit and the BNSF will be in an extraordinary position to complete for any business that moves two thirds or more of the way across the continent. Well, the old argument used to be that capacity caused prices to fall, and constrained capacity caused prices to rise. Now, with a hugely expensive capacity expansion, coming fully available at just about the time as traffic should begin to decline as a result of the normally expected business cycle, doesn't this particular scenario suggest that something different would happen? The idea of "an extraordinary position to compete" is suggestive to me .... even as costs of operation and paying off the new investment will necessarily be higher ... compelling the need to get the business ... compelling the usual cost-cutting to fill the lanes ....This angle just doesn't fit too well, if the premise is that Buffett is taking into account the downside of a business cycle, which judging by the BH cash position, suggests that he is ....
"Well, the old argument used to be that capacity caused prices to fall, and constrained capacity caused prices to rise." is very true.
But there's another variable in play here as well. Yes, there probably will be some drop off in traffic as the business cycle cools; but with the opening of the last segments of Chicago - Los Angeles double track corridor, BNSF will begin to enjoy
Delayed train expenses include ...
When BNSF realizes a smoother operation due to the elimination of capacity restraints, they will be producing a more attractive, service reliable product that customers will be more willing to use.
Railroad managers are motivated to invest in capacity improvements as a means of eliminating recurring and painfully costly bottlenecks. In those corridors that are also experiencing traffic growth, this activity becomes even more important. With each additional mile of double track built or CTC installed, the operation, as it impacts all trains, becomes a little better. Velocity improves; locomotive, car, and crew utilization gets better; the kind of service reliability that customers crave becomes more consistent; but, that doesn't automatically mean that market forces are going to punish a railroad with lower freight rates. In today's transportation environment I just don't see where an improving and more attractive operation has to result in a lock-step decrease in freight rates,
Yes with a business cycle downturn there probably will be some downward pressure on freight rates, but if the BNSF Chicago - L.A., TOFC/COFC-heavy corridor succeeds in producing a better product and their competition - chiefly truck lines - continues to feel the pinch of labor shortages and high fuel costs, I predict the overall lessening of freight rates, if any, will be far less than the historic norms.
Michael:
Interesting comments regarding BH's cash positions and seemingly being at the wrong end of the cycle. However...if BH was heavily invested at the time of the dotcom boom, then it certainly worked out well, didnt it?
Lets see, Buffett was tsk-tsked for being out of touch and avoiding technology stocks...see Barron's cover story (December 27, 1999). Yet over the next three years BH shares appreciated 40% while the NASDaQ lost more than 60%. So, if he was fully loaded, it was in companies which allowed BH stock to perform quite well.
Perhaps you should read BH's annual reports, they are well worth the time invested...well thought out and well written. Unlike most annual reports, these contain considerably more than glossy pictures. Buffett and Munger discuss at length their investments and mistakes made.
All annual reports are available on line. Usually the reports take about an hour to read.
Convicted One wrote: Murphy Siding wrote: What would you think is driving this? Warren Buffett quote: - "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Wasn't Berkshire one of the companies that bought part of EMD?
That was Berkshire Partners of Boston, not Berkshire Hathaway of Omaha (Buffett). Two completely different companies.
MP173 wrote: Interesting comments regarding BH's cash positions and seemingly being at the wrong end of the cycle. However...if BH was heavily invested at the time of the dotcom boom, then it certainly worked out well, didnt it?
Well, what I was trying to point out was that he had about $3 billion in cash during that time -- he was heavily invested which meant he obviously thought it was at the beginning of a business cycle. Compared to $40 billion now.
Well aware of his feelings about tech stocks; but he had a tiny cash position during that period of time -- and of course both tech and nontech had quite a run during that period. However, if I tried to identify the time period as the non-dotcom boom, I'm not sure anyone would have understood the time frame I was referring to.
Bob-Fryml wrote:...but with the opening of the last segments of Chicago - Los Angeles double track corridor, BNSF will begin to enjoy a noticable increase in velocity, with a concomitant increase in locomotive and freight car utilization, and a measurable drop in delayed train expenses due to congestion.....Yes with a business cycle downturn there probably will be some downward pressure on freight rates, but if the BNSF Chicago - L.A., TOFC/COFC-heavy corridor succeeds in producing a better product and their competition - chiefly truck lines - continues to feel the pinch of labor shortages and high fuel costs, I predict the overall lessening of freight rates, if any, will be far less than the historic norms.
....Yes with a business cycle downturn there probably will be some downward pressure on freight rates, but if the BNSF Chicago - L.A., TOFC/COFC-heavy corridor succeeds in producing a better product and their competition - chiefly truck lines - continues to feel the pinch of labor shortages and high fuel costs, I predict the overall lessening of freight rates, if any, will be far less than the historic norms.
And I agree. The point of my earlier post was to the effect that something will happen in the next downturn that hasn't happened before as the rail industry as a whole "decongests" and that will be a reduction in marginal costs, which is what you are saying above. The difference between that reduction occuring as the result of a downturn is that there is no additional investment necessary to make it happen; whereas if and when it happens as a result of new constuction, that adds a cost element.
Bob-F,
Thank you for analysis that is other than scholastic. It sounds like you may be employable by a railroad.
Here is a bit of six degrees of separation trivia.
With the BH purchase, Marsico Capital Management becomes the second largest holder of BNI with 30+ million shares
Marsico was started by Tom Marsico in 1997.
Tom Marsico was previously the Investment Manager for the Janus Fund.
Janus Capital was previously own by Kansas City Southern Industries.
Just a couple of rail fans with money.
Hey, isn't this the guy who gave a sizable charitable donation amounting to billions...........to Bill Friggin' Gates?!
Maybe this buying of BNI on the high side is a sign of senility.
futuremodal wrote: Hey, isn't this the guy who gave a sizable charitable donation amounting to billions...........to Bill Friggin' Gates?!Maybe this buying of BNI on the high side is a sign of senility.
I believe that it was to the charitable foundation established by Gates, more than a slight shade of difference there. As mentioned earlier, Buffett has customarily been a long-term investor, and he sees things in that light.
MichaelSol wrote: Murphy Siding wrote: MichaelSol wrote: I don't think he got where he is by being the last guy on the block to notice the obvious. Something else is driving this. What would you think is driving this?Well, looking at BH's cash position over the last decade, there is an interesting pattern. They seem to have been pretty heavily invested at the time of the dotcom boom, and then began to convert to cash 3-4 years ago. Now, going into cash before the stock market really takes off is not exactly good timing. You miss the appreciation in stock that presumably was the reason you bought stock in the first place. Then, his vaunted position in Coca Cola occurred during a time when Coke began to crumble -- it's historic primacy over Pepsico disintegrated -- Pepsico is now the king of the hill, and Buffett resigned from the Coca Cola board -- one of the few he took an active role in. Good call, bad call?Then, to be sitting on piles and piles of cash for three years or more, while interest rates are at historic lows is also not exactly "textbook" portfolio management; all the while watching good companies throw off cash and stock appreciation right and left.Then to move on railroad stock at a historic high at a point in time when it actually makes sense to move into cash, according to Buffett's own past track record -- well, it all amounts to an interesting spectacle. We are coming to the end of a business cycle. But, we are not there yet. There would be plenty of time and opportunity to buy good railroad stock at lower prices. No need to get in a rush, at this particular point in time. And there was plenty of time to buy this stock earlier -- at far lower prices.That huge cash pile meant Buffett expected something much earlier, and it obviously didn't happen. Oh well, no one cries when they still have $40 billion in the bank. But, he's moving very little into stocks -- the railroad play is a drop in the bucket.
Murphy Siding wrote:I'm confused. You make it sound as if you think Buffet is doing this because he doesn't know what he's doing?
I don't make it sound anything. It is a recitation of a series of events. If you believe, for instance, that Coca Cola was a good play over the period of time that Pepsico surpassed it, and Buffett finally resigned from the Coke Board, well, I don't know how that sounds, but that is what happened. That he went to a huge cash position over three years ago, just as the stock market began a historic run-up, well, doesn't he make his money from stock appreciation, not keeping money in the bank? That his current very large cash position signals a belief that the economy is headed for a downturn? I don't know what that sounds like either just because I happen to say that he did it.
I mean, he did it. How is it supposed to sound?
And I don't mean this to sound as sarcastic as it probably appears in print, but this just strikes me as an odd question.
What am I supposed to say about Buffett?
I did say, above, that I do believe he has a reason for this particular purchase, and I do think it is a strategy to buffer the effects of a downturn on his stock portfolio as railroads should become more profitable with a downturn. That would be an historical anomaly, but I happen to think it will happen, or at least it could happen, and it makes sense to me that he might see that as well.
But I also caution that there is a well-developed record of Buffett's investment strategies and they don't always work out quite to perfection; he is usually the first to say so. Indeed, the cash position over this past three years is contrary to his own textbook approach which only confirms to me that even the best, in the stock game, sometimes misjudge the market. The huge cash position over the past three years tells me he did because during a similar market run-up ten years ago, he was in up the hilt because that is where you want to be when the market runs.
What I did intend to suggest is that the reasons offered by some for his purchase don't make any particular sense because the identical conditions existed five years ago; all those trends were well into place. My point was that if those gentlemen are correct, then they would be suggesting that Buffett is well nigh clueless if those are the reasons he is getting in at this late date; because they would be suggesting that Buffett is the last guy on the block to figure out, for instance, that BNSF serves West Coast ports -- as an example.
And I don't agree that Buffett is slow, or that he just figured out that that BNSF serves the Powder River Basin.
Limitedclear wrote: That was Berkshire Partners of Boston, not Berkshire Hathaway of Omaha (Buffett). Two completely different companies. LC
Ohhh
Thanks
MichaelSol wrote: ...... that I do believe he has a reason for this particular purchase, and I do think it is a strategy to buffer the effects of a downturn on his stock portfolio as railroads should become more profitable with a downturn. That would be an historical anomaly, but I happen to think it will happen, or at least it could happen, and it makes sense to me that he might see that as well.
...... that I do believe he has a reason for this particular purchase, and I do think it is a strategy to buffer the effects of a downturn on his stock portfolio as railroads should become more profitable with a downturn. That would be an historical anomaly, but I happen to think it will happen, or at least it could happen, and it makes sense to me that he might see that as well.
Murphy Siding wrote: Michael-thank you for the clarification. Could you expand on the idea of why railroads should become more profitable with a downturn please?
The standard railroad marginal cost curve -- and it is a curve -- begins to rise on a single track mainline at about 16 trains per day. Train order, ABS, CTC, doesn't make much difference. Above that, friction in the form of increased meets begins to increase the marginal cost of handling each carload. Bob Fryml explains that very well above. Double track, triple track, the cost curve is in a different spot, but the nature of the curve doesn't change. The more congestion, the more it costs to handle a carload of freight. There is an optimal number of trains on a single track mainline, at which the combination of fixed costs, operating costs, financing costs, etc, yields the most profitable situation for a single track line, and it is a surprisingly low number of trains. The area of maximum profitability on the cost curve for a single track mainline is between 7 and 16 trains. Then costs start to go up and profitability declines.
As we discussed earlier on the thread, once past that optimum, profit still increases, but marginal costs increase still faster and that is why profitability declines.
Naturally, there happened to be a good statistical reason why the PCE was very profitable at 9 trains per day compared to its busier peers. It happened to be operating at a strategic optimum.
Currently, in my view, the railroads are earning the least profit on their most competitive corridors -- where the marginal costs of operation are the highest; not to mention the intermodal freight there is expensive freight because it involves more handling, more need for the most expensive facilities in high cost waterfront areas. And it returns the lowest yields, while creating the circumstances for the highest possible marginal cost of operation for all freight that has to move on the same corridors.
Is Buffett betting on a downturn? Well, I think he has to be.
What might he expect happens in a downturn? Imports drop? That would have to be the single biggest effect on railroads. If import and export intermodal declines appreciably, that automatically takes low revenue stuff out of the financial picture, lowers the cost of operation for carrying remaining freight, and as traffic in general might decline, and congestion eases substantially, railroad profitability increases for all those reasons -- including eliminating the need for vast further expenditures to carry low profit freight.
If, and it is a big "if", he is looking at it that way, it may be because he sees railroads as being one of the few investments that might benefit from a downturn, his cash position clearly suggests that he thinks one must be coming, and given the average number of months that expansions have historically lasted over the past century, this particular expansion should be running out of steam pretty soon.
And I don't think Buffett would be making a big play right now if he thought railroads were going to be hurt in a downturn. And I am sure he is aware that railroads are generally hurt the worst in a downturn, but that something will make this one different.
Alright I hope I'm not too unpopular for this, remember I'm a realist first and a railfan (a close) second:
Railroads currently are working on a system far more robust and logical than the one of 30 years ago. It used to be that when the economy boomed, railroads did too, and likewise the opposite, however after the 1950s several railroads were far less healthy than they let on, Pennsy and Rock Island come to mind here. The problem created by too many railroads that were too small shaped the entire sector until the turn of the century.
Remember Penn Central, when your profits are only paper and your opperating costs are skyrocketing, you are very very likely headed for a catastrophic failure.
The mega-mergers that resulted in our current UP, BNSF, KCSdeM, CP, CN, CSX & NS national railroad market saved the industry, and the United States. The system finally has reached the point where through strong leadership, prudent investment in the physical plant and thoughtful planning, every single Class 1 can be profitable, period. There really are not entire railroads whose entire existance is a mistake (such as Rock Island) anymore, at least not among the major players. The sector is strong, even in our economy with is becoming increasingly shakey due to the downturn in the real estate market.
Buffet is a smart man, no questions asked and I think he knows a good long term prospect for growth when he and his advisors see it. Also in owning a decient chunk of the BNSF, and with his name recognition influencing other shareholders, he's going to be a force whenever there are shareholder votes. It seems that since equilibrium has finally begun to become a reality within the railroad industry, the talks of more mega mergers is trailing off, but I wonder how long that is going to last. My bet is at least a good few years if not longer.
Cheers!
~METRO
How interesting. If Buffet bought 39 mil shares, the BNSF is a cash cow, has the moat and a good business model. And regardless of current share price, it's undervalued! If Buffet doesn't like the management he can for sure get a couple of his own people on the board. As a matter of fact he could probably get all the institutional investors behind him and replace all the directors.
AT first I thought maybe a UP/BNSF merger but that couldn't possibly get past the Sherman act.
This is a good discussion. I hope the fleeting mention of the PCE doesnt turn it into a free for all.
Regarding his holdings of considerable cash a few years ago, I cannot comment at this time without looking at the annuals and I will attempt to do that later. However, I do know he WILL not invest cash just to be fully loaded if companies do not meet his threshold.
Also, the statement was made on making $$ on capital appreciation of equites, not exactly correct. About the time we are discussing he made a large investment in so called junk bonds (which are rated below a certain level by the ratings services). It was classic Buffett as he identified outstanding value at low prices and made a killing.
I also seem to recall he purchased considerable amount of treasuries several years ago but might be wrong on that.
Finally, I dont see how a decrease in volume will lead to an increase in earnings per share or more importantly in free cash flow, unless capex is curtailed in the cash flow picture.
BTW...what will BNSF do once the Transcon line is up and running as a 2MT? Where do you see the next wave of investment? If there is none of significance, just think of all of that extra cash. Can you spell "stock buyback program". For 2006 BNSF purchased over $730 million in stock. That is in addition to the nearly $2.1billion in capex. I dont know what a "normal" capex would be but it seems that once the Transcon line is upgraded there will be a significant reduction in capex.
MP173 wrote: Finally, I dont see how a decrease in volume will lead to an increase in earnings per share or more importantly in free cash flow, unless capex is curtailed in the cash flow picture.
Well, I think that is inherently part of the picture -- all the way across the board, equipment, physical plant, maintenance requirements -- everything climbs down substantially when the machine isn't being run full bore ....
But...wouldnt that be the time to maintain capex...when the "machine isnt running full bore"? From an operations standpoint it would, financially perhaps not, but at least you would get ready for the next big business cycle.
BTW, a reduction in capex would not significantly affect the net income as most of those expenses would be depreciated over a long period of time. Correct?
MP173 wrote: Finally, I dont see how a decrease in volume will lead to an increase in earnings per share or more importantly in free cash flow, unless capex is curtailed in the cash flow picture.Where do you see the next wave of investment? If there is none of significance, just think of all of that extra cash. Can you spell "stock buyback program". ed
Where do you see the next wave of investment? If there is none of significance, just think of all of that extra cash. Can you spell "stock buyback program". ed
Hmmm, maybe you answered your own question. After a buyback the "decrease in volume" (of outstanding common shares) will increase earnings per share.
Just joking :-)
bakupolo:You are dead on correct. If capex returns to normal levels, the buybacks will continue at a higher pace and eps will increase with reduced number of shares.
BNSF is in a good place right now.
One thing that bothers me a bit...fuel surcharge revenue. STB has indicated no more tricks with those charges. Just wondering how much of the high revenues and earnings for the rails were due to fuel surcharge? Being in the transportation industry years ago, we certainly used it to pad the revenue.
RE: Fuel surcharges; BNSF is the one RR that is close to if not in agreement with what is being proposed by STB.
Being new to this site I am under the impression that we have theorists who may be educators, students or of some other discipline but have little 'real world experience' in the RR business who are weighing in on this issue of what is a good business plan for a RR over the long haul.
To the extent I am mistaken, perhaps completely, please advise. But it seems to me that BNSF has been getting it right and probably is not that concerned with peaks and vallys in the economy which happen, of course, but are not predicitable. They see the long view.
diningcar wrote: Being new to this site I am under the impression that we have theorists who may be educators, students or of some other discipline but have little 'real world experience' in the RR business who are weighing in on this issue of what is a good business plan for a RR over the long haul.
Depends. Who are you judging and how are you judging it?
From years of experience?
As a railroader? What kind? Surveyor? Engineer? Brakeman? VP Finance? Conductor?
As an economist?
As an investor?
The "railroader" who believed that deregulation would allow the railroad to raise rates? Then wondered why rates fell?
Perhaps as a "Warren Buffett" who has no "real world experience" in railroading? Dumb as a box of rocks, right? Never turned a wheel, right? Doesn't know a d*** thing, right?
Perhaps as a "Kent Healy" who taught generations of "real railroaders" while being an academic?
Perhaps as an "Alfred Kahn" who literally defined "deregulation" and now insists, "this isn't it".
Perhaps as a Matt Rose, a trucker, who made it work, when a railroader, Rob Krebs, fell on his face?
Perhaps as a George Bush, who said that tax cuts and deregulation and globalization would spur growth for everyone? But, since he's not a "railroader", nothing that occured as a result of his economic polcies really happened?
Who do you think is a theorist, and why do you think the label outweighs looking at the facts?
MP173 wrote: BTW, a reduction in capex would not significantly affect the net income as most of those expenses would be depreciated over a long period of time. Correct?
Ed, I agree with you most of the time, but I just can't keep up with your changes between free cash flow, and then a net income argument based on depreciation. I mean, it is yes and it is no, but one is different than the other.
MichaelSol wrote: The "railroader" who believed that deregulation would allow the railroad to raise rates? Then wondered why rates fell?
Well, actually as a guy who did railroad pricing before and after dereg, we knew the problem was that we couldn't lower the rates to compete with the trucks and barges, not that we couldn't raise them. The asinie government regulators kept rail rates high and diverted freight off the railroads. See "In the Matter of Container Service" by your Federal Government in 1931
Then we have...
MichaelSol wrote: Naturally, there happened to be a good statistical reason why the PCE was very profitable at 9 trains per day compared to its busier peers. It happened to be operating at a strategic optimum.
Oh sure, they ripped a profitable railroad out of the ground. They do that every day. Everybody is stupid.
Look, there is fantasy baseball and there is fantasy football. Michael plays fantasy railroading. OK by me. Just don't take it seriously.
greyhounds wrote: MichaelSol wrote: The "railroader" who believed that deregulation would allow the railroad to raise rates? Then wondered why rates fell?Well, actually as a guy who did railroad pricing before and after dereg, we knew the problem was that we couldn't lower the rates to compete with the trucks and barges, not that we couldn't raise them. The asinie government regulators kept rail rates high and diverted freight off the railroads.
Well, actually as a guy who did railroad pricing before and after dereg, we knew the problem was that we couldn't lower the rates to compete with the trucks and barges, not that we couldn't raise them. The asinie government regulators kept rail rates high and diverted freight off the railroads.
False. Utterly. The argument was that deregulation would "finally" allow railroads to raise rates to where they should be. Former ICC Chairman Darius Gaskins, former BN President Darius Gaskins, comments on this huge miscalculation, "boy, did we get it wrong."
Naturally, of course, a railroad president wouldn't know what he was talking about, even he was previously an economist who advocated deregulation, and a government regulator who was accused of keeping rates too low ...
As opposed to this character who was, charitably, none of the above ...
greyhounds wrote: MichaelSol wrote: The "railroader" who believed that deregulation would allow the railroad to raise rates? Then wondered why rates fell?Well, actually as a guy who did railroad pricing before and after dereg, we knew the problem was that we couldn't lower the rates to compete with the trucks and barges, not that we couldn't raise them. The asinie government regulators kept rail rates high and diverted freight off the railroads. See "In the Matter of Container Service" by your Federal Government in 1931Then we have... MichaelSol wrote: Naturally, there happened to be a good statistical reason why the PCE was very profitable at 9 trains per day compared to its busier peers. It happened to be operating at a strategic optimum.Oh sure, they ripped a profitable railroad out of the ground. They do that every day. Everybody is stupid.Look, there is fantasy baseball and there is fantasy football. Michael plays fantasy railroading. OK by me. Just don't take it seriously.
The gentleman has no figures, no facts, but he has an ideology. He will stick with it.
Here are the studies that showed profitability:
Milwaukee Planning Staff, 1978. Fred Simpson.
Strategic Planning Studies, May, 1979. Booz Allen Hamiton.
Application to Abandon, August, 1979, Trustee, Stanley Hillman.
Lines West Study, Office of Rail Public Counsel, ICC, 1979, Henri Rush. (current General Counsel, STB).
Opinion, Interstate Commerce Commission, 1980. Darius Gaskins, Chmn.
He never has, and he can't, offer a single study, a single number, a single coherent argument in favor of his favorite troll hobby: railroad trashing.
Just don't take it seriously.
But, if you are remotely inclined to, ask him first; where's his data?
Just ask him.
Please ask him.
You won't get an answer.
He doesn't have one.
Trolls never do.
I'd love for Buffet to invest in whatever stock I happened to be holding. When he made the public filing he had acquired 10% of BNSF the stock was around $85. It closed last night just under $92. Other railroads have also increased, it is just possible he has dragged the whole industry up.
Also it would be nice to know that someone I regard as a whole lot smarter at investing than I am is investing where I am.
Michael:A reduction in capital expenditures will not seriously reduce the net income, as capex's are by nature capitalized and the depreciated over the life of the asset or the time allowed by the IRS.
However, it has a very large impact on free cash flow, which measures the actual cash generated by a business over the time period and the amount invested (which would include capex). A reduction in capex for a year will heavily impact FCF in that time, preserving cash or keeping a company from borrowing.
And as we all know...cash is king.
A senile Warren Buffet is still 3x10,000,000 smarter and wiser than you FM so why not keep the personal attacks to a minimum...
And BTW the charitable contribution was to the Gates Foundation, not Bill personally...
But then again, precision was never your thing. As I recall Bill Gates is also a major shareholder in the strike ridden CN. Does that make him senile too??? A couple of senile Billionaires, darn...we should all be so challenged...FOFLMAO...
Limitedclear wrote: futuremodal wrote: Hey, isn't this the guy who gave a sizable charitable donation amounting to billions...........to Bill Friggin' Gates?!Maybe this buying of BNI on the high side is a sign of senility.A senile Warren Buffet is still 3x10,000,000 smarter and wiser than you FM so why not keep the personal attacks to a minimum...And BTW the charitable contribution was to the Gates Foundation, not Bill personally...But then again, precision was never your thing. As I recall Bill Gates is also a major shareholder in the strike ridden CN. Does that make him senile too??? A couple of senile Billionaires, darn...we should all be so challenged...FOFLMAO...LC
Berkshire Hathaway Cash and Cash Equivalents
[Millions]
2006 $37,9772005 $40,4712004 $40,0202003 $31,2622002 $10,2942001 $5,3132000 $5,2631999 $3,8351998 $13,5821997 $1,0021996 $1,3391995 $2,703
Dakguy201 wrote: I'd love for Buffet to invest in whatever stock I happened to be holding. When he made the public filing he had acquired 10% of BNSF the stock was around $85. It closed last night just under $92. Other railroads have also increased, it is just possible he has dragged the whole industry up.Also it would be nice to know that someone I regard as a whole lot smarter at investing than I am is investing where I am.
Warren Buffett is at the point where he can make money simply by announcing what he has invested in. Russell Sage used to do that with railroads ....
MichaelSol wrote: Dakguy201 wrote: I'd love for Buffet to invest in whatever stock I happened to be holding. When he made the public filing he had acquired 10% of BNSF the stock was around $85. It closed last night just under $92. Other railroads have also increased, it is just possible he has dragged the whole industry up.Also it would be nice to know that someone I regard as a whole lot smarter at investing than I am is investing where I am. Warren Buffett is at the point where he can make money simply by announcing what he has invested in. Russell Sage used to do that with railroads ....
Which raises an interesting point: what are the other two railroad properties BH has bought into? I gather they had to disclose the BNSF purchase because of the size, but the other two were apparently smaller, and have not been publicly announced.
http://mprailway.blogspot.com
"The first transition era - wood to steel!"
MidlandPacific wrote:Which raises an interesting point: what are the other two railroad properties BH has bought into? I gather they had to disclose the BNSF purchase because of the size, but the other two were apparently smaller, and have not been publicly announced.
She who has no signature! cinscocom-tmw
Mookie wrote: MidlandPacific wrote:Which raises an interesting point: what are the other two railroad properties BH has bought into? I gather they had to disclose the BNSF purchase because of the size, but the other two were apparently smaller, and have not been publicly announced. I heard, but don't have a clue which ones they were - you are right - they were smaller lines, not one of the Big 5.
Well, I don't know whether they were smaller lines - I meant that I thought the purchases were smaller. I'm not an authority on equity trading regulations, but I thought (I hope someone will correct me if I'm wrong) that there's an SEC requirement to report stock purchases if the stake in the company is a certain size. I gather that the purchases of the other two were smaller, proportionally, than the BNSF buy.
But it makes sense to me that it might be a smaller company - where else in the Big Five, other than BNSF, would a guy like Buffett put his money? The only one I can think of is NS. Anyone have any thoughts on potential purchases?
MP173 wrote: A reduction in capital expenditures will not seriously reduce the net income, as capex's are by nature capitalized and the depreciated over the life of the asset or the time allowed by the IRS.
A reduction in capital expenditures will not seriously reduce the net income, as capex's are by nature capitalized and the depreciated over the life of the asset or the time allowed by the IRS.
My thought is that reducing capital expenditures would increase net income. Two reasons: first, once the property subject to depreciation stops increasing in value because of additions, likewise the depreciation deduction levels off, or perhaps even begins declining at some point. Second, the debt underlying capital improvements does not continue to grow, and debt service payments level off, or even begin to decline as debt is retired.
Too, big capital projects usually introduce their own friction into the system, and once those projects end, general efficiency picks up and profitability improves.
I agree -- and this would contribute to accounting profit because the company would not be borrowing -- i.e. it would not be increasing future debt service payments.
Perhaps we are saying the same thing, differently.
He came back screaming from an undergraduate accounting exam, where the two "fill in the blank" questions, his favorites, came back from a few students -- "it's not my fault" and "cash is good."
The two that makes financial sense is NS and CN. NS generates just about the same amount of free cash flow as BNSF ($1.028billion vs $1.094 for BNSF) on considerably lower revenue. It is obviously a better run railroad in the east than the CSX. However, there are some indications that CSX is starting to turn things around....debt is getting paid down, operating margins are improvingand sales growth is pretty strong. Still, they are CSX! and there is quite a bit of work to do.
I am not sure I would get too bullish on NS. Love the railroad and the way they run their railroad but do they hold a significant advantage over CSX on route structure? BNSF has a clear advantage at this time with their Transcon line and also their Northern Tier line. Can you say NS has the same advantage?
The other compelling financial pick is CN. Their free cash flow/revenue ratio is 20% vs 7.3% for BNSF and 11.2% for NS. During the past two years CN has purchased over 10% of its common stock with that excess cash.
The reason CN is repurchasing the stock is the lack of investment opportunities. Which brings up the question...what other railroads could they purchase? KCS perhaps?
greyhounds wrote:Well, actually as a guy who did railroad pricing before and after dereg, we knew the problem was that we couldn't lower the rates to compete with the trucks and barges, not that we couldn't raise them. The asinie government regulators kept rail rates high and diverted freight off the railroads. See "In the Matter of Container Service" by your Federal Government in 1931
Simply a false history.
Comments by Darius Gaskins, former Chairman, Interstate Commerce Commission, former President, Burlington Northern Railroad:
"On the other hand, the railroad industry was a different situation. The Staggers Act was a revolutionary Act, and it was based on a difference of opinion between the railroads and the shippers. The railroads were convinced that without the straitjacket regulation and without having to make collective rates through rate bureaus and the ability to have confidential contracts, that they were going to return to profitability through higher rates.
"That's what they thought. The shippers were very concerned about that, and they thought the railroads had too much power, and so they were also afraid of higher rates. The railroads said, you can wipe out the ICC, we don't care. The shippers said, no you can't do that, we don't know what's going to happen with this deregulated monster."
Progress on Point, Periodic Commentaries on the Policy Debate, Release 11.22 December 2004, Panel Discussion: Reinventing the FCC for the Digital Age
I believe you are both correct, but neither wants to admit it.
Plenty of situations existed in which the rails could not lower rates. Big John hopper rates is just one that I can think of.
Were shippers concerned with Staggers? Sure, it worked out tho. Productivity gains helped reduce lower rates, which shippers took advantage of. Regulation just fueled a huge situation which benefited labor and not many others.
MP173 wrote: I believe you are both correct, but neither wants to admit it.Plenty of situations existed in which the rails could not lower rates. Big John hopper rates is just one that I can think of.
Well, I will go with Gaskins on that one for two reasons. No. 1: he is credible. No. 2: he reflects accurately the record made at the time in support of passage of the Staggers Act. Nobody was arguing that the railroads "wanted" to cut rates. That is simply false. There is a well-developed record on the matter.
And that's exactly what the railroads wanted. Who testified against the NYC intermodal rates in 1931? The railroads. Who fought Big John? The railroads.
Recall that the entire idea of regulation was the railroads' own bright idea specifically designed to prevent rate reductions. The ICC was set up precisely to knock down innovation, rate cutting, "competitive" nonsense. Railroads wanted rate increases; not the opportunity for rate reductions. They were already losing money -- cutting rates to "compete" with trucks hardly seemed like the way to fix it. When the ICC became an obstacle to raising rates, the industry lost its enthusiasm for regulation, pure and simple.
LC!! Again with the subintellectual "FOFLMAO" and the par-for-the-course personal attack?
Are you ever going to evolve into an actual human being? So much for keeping the personal attacks to a minimum!
Par for the course for this minor league A-hole.....
My turn. My take is that Warren Buffett believes that Global Warming mitigation policies are going to radically change things. Transportation is still going to be needed. Even if PRB coal diminishes, no other mode of transportation has a viable means to transition to alternative fuels as easily as rail. Biofuels are only a means of transition, not a solution. Hydrogen is a Chimera, the only large source of Hydrogen is to extract it from water. This is going to take more energy than it produces, yes you can strip it from Hydrocarbons like Oil and Natural Gas. They are in short supply now, and obtaining Hydrogen from this source does nothing to reduce the liberation of CO2. In case you haven't guessed yet the viable source of power is Electricity and Electrification. Look for it to happen first in the LA Basin. Already BNSF and UP have agreements to eliminate operation of pre- Tier 2 locomotives from the basin. What happens when Tier 3 debuts? What was missing from previous Electrification studies, was the traffic density that many mainlines now have.
MidlandPacific wrote:Well, I don't know whether they were smaller lines - I meant that I thought the purchases were smaller. I'm not an authority on equity trading regulations, but I thought (I hope someone will correct me if I'm wrong) that there's an SEC requirement to report stock purchases if the stake in the company is a certain size. I gather that the purchases of the other two were smaller, proportionally, than the BNSF buy.
This is off the cuff and the top of my head after a couple of years, but there is a regulation that requires you to file some paperwork with the SEC if you get more than 5.0% of a certain class (ostensibly voting) of stock. Also, I think the board and senior management of the company had the right to require you to state your intentions, whether it be control of the company or simply raking in the profits. On the other hand, I may be thinking of the events immediately prior to the triggering of a poison pill; a quick glance at the SEC's forms site didn't show anything that jumped out at me as the one I was thinking of. I could be completely off-base here and will be embarrassed if I am. =P
I agree with you that whatever stake Mr. Buffett & Co. wound up taking in Railroad B must be beneath the reporting threshold and/or smaller than their stake in the Burlington Northern & Santa Fe. (Take that, Matt Rose.)
OK, that's about the first and last thing I understand on this thread other than "Warren Buffett lives in Omaha, Nebraska". You gentlemen continue your discussion of eldritch deities called fi-nan-ce and eco-nom-et-ric.
beaulieu wrote: My turn. My take is that Warren Buffett believes that Global Warming mitigation policies are going to radically change things. Transportation is still going to be needed. Even if PRB coal diminishes, no other mode of transportation has a viable means to transition to alternative fuels as easily as rail. Biofuels are only a means of transition, not a solution. Hydrogen is a Chimera, the only large source of Hydrogen is to extract it from water. This is going to take more energy than it produces, yes you can strip it from Hydrocarbons like Oil and Natural Gas. They are in short supply now, and obtaining Hydrogen from this source does nothing to reduce the liberation of CO2. In case you haven't guessed yet the viable source of power is Electricity and Electrification. Look for it to happen first in the LA Basin. Already BNSF and UP have agreements to eliminate operation of pre- Tier 2 locomotives from the basin. What happens when Tier 3 debuts? What was missing from previous Electrification studies, was the traffic density that many mainlines now have.
Whether Warren thinks this way or not, there is no concievable way for CO2 mitigation policies to have anything but a profoundly negative effect on the railroads. The only viable replacement for coal fired power plants are nuclear plants, and nuclear plants have nothing to offer the railroads in terms of income potential. This whole biofuels movement is a crock as well, there is no physical way for biofuels to amount to more than a mere 5% give or take of the US liquid fuel demand. We are already seeing the economic impact of current ethanol mandates in terms of the effect on food prices, and that is an indication of a natural economic ceiling for such endeavors.
The only possible saving grace for railroads in a CO2 constrained world is if CTL projects blossom, which might result in coal movements of some distance. But it's not the same as need to haul coal for power plants. Most power plants are located closer to the consumer markets, while most fuel plants can be located a world away from the consumer markets. The likelyhood is that most such plants would be mineside, and the output would then move by pipeline rather than rail. Only ethanol must move by rail.
Of course, there's the other prospect regarding CO2 regulation - maybe, just maybe, our elected officials will wake up and smell the fraud of the whole MMGW movement, and alleviate us from any such economically disasterous nonsense. Warren is a certified lefty, so that does indicate a certain degree of mental incompetence. If so, BH will be the next Enron.
futuremodal wrote: beaulieu wrote: My turn. My take is that Warren Buffett believes that Global Warming mitigation policies are going to radically change things. Transportation is still going to be needed. Even if PRB coal diminishes, no other mode of transportation has a viable means to transition to alternative fuels as easily as rail. Biofuels are only a means of transition, not a solution. Hydrogen is a Chimera, the only large source of Hydrogen is to extract it from water. This is going to take more energy than it produces, yes you can strip it from Hydrocarbons like Oil and Natural Gas. They are in short supply now, and obtaining Hydrogen from this source does nothing to reduce the liberation of CO2. In case you haven't guessed yet the viable source of power is Electricity and Electrification. Look for it to happen first in the LA Basin. Already BNSF and UP have agreements to eliminate operation of pre- Tier 2 locomotives from the basin. What happens when Tier 3 debuts? What was missing from previous Electrification studies, was the traffic density that many mainlines now have.Whether Warren thinks this way or not, there is no concievable way for CO2 mitigation policies to have anything but a profoundly negative effect on the railroads. The only viable replacement for coal fired power plants are nuclear plants, and nuclear plants have nothing to offer the railroads in terms of income potential. This whole biofuels movement is a crock as well, there is no physical way for biofuels to amount to more than a mere 5% give or take of the US liquid fuel demand. We are already seeing the economic impact of current ethanol mandates in terms of the effect on food prices, and that is an indication of a natural economic ceiling for such endeavors.The only possible saving grace for railroads in a CO2 constrained world is if CTL projects blossom, which might result in coal movements of some distance. But it's not the same as need to haul coal for power plants. Most power plants are located closer to the consumer markets, while most fuel plants can be located a world away from the consumer markets. The likelyhood is that most such plants would be mineside, and the output would then move by pipeline rather than rail. Only ethanol must move by rail.Of course, there's the other prospect regarding CO2 regulation - maybe, just maybe, our elected officials will wake up and smell the fraud of the whole MMGW movement, and alleviate us from any such economically disasterous nonsense. Warren is a certified lefty, so that does indicate a certain degree of mental incompetence. If so, BH will be the next Enron.
CTL does nothing for Carbon Emissions. If the Government goes with a Cap and Trade scheme, the railroads being a large carbon emitting entity versus several thousand small trucking companies, would be well placed to create a revenue stream by electrifying and then selling the unneeded carbon emissions to pay down the debt incurred. With any CO2 mitigation scheme, the most efficient fuel user will be affected the least, across land, that is the railroads. Transportation ranks right up there with power generation as a source of Carbon Emissions.
beaulieu wrote: futuremodal wrote: beaulieu wrote: My turn. My take is that Warren Buffett believes that Global Warming mitigation policies are going to radically change things. Transportation is still going to be needed. Even if PRB coal diminishes, no other mode of transportation has a viable means to transition to alternative fuels as easily as rail. Biofuels are only a means of transition, not a solution. Hydrogen is a Chimera, the only large source of Hydrogen is to extract it from water. This is going to take more energy than it produces, yes you can strip it from Hydrocarbons like Oil and Natural Gas. They are in short supply now, and obtaining Hydrogen from this source does nothing to reduce the liberation of CO2. In case you haven't guessed yet the viable source of power is Electricity and Electrification. Look for it to happen first in the LA Basin. Already BNSF and UP have agreements to eliminate operation of pre- Tier 2 locomotives from the basin. What happens when Tier 3 debuts? What was missing from previous Electrification studies, was the traffic density that many mainlines now have.Whether Warren thinks this way or not, there is no concievable way for CO2 mitigation policies to have anything but a profoundly negative effect on the railroads. The only viable replacement for coal fired power plants are nuclear plants, and nuclear plants have nothing to offer the railroads in terms of income potential. This whole biofuels movement is a crock as well, there is no physical way for biofuels to amount to more than a mere 5% give or take of the US liquid fuel demand. We are already seeing the economic impact of current ethanol mandates in terms of the effect on food prices, and that is an indication of a natural economic ceiling for such endeavors.The only possible saving grace for railroads in a CO2 constrained world is if CTL projects blossom, which might result in coal movements of some distance. But it's not the same as need to haul coal for power plants. Most power plants are located closer to the consumer markets, while most fuel plants can be located a world away from the consumer markets. The likelyhood is that most such plants would be mineside, and the output would then move by pipeline rather than rail. Only ethanol must move by rail.Of course, there's the other prospect regarding CO2 regulation - maybe, just maybe, our elected officials will wake up and smell the fraud of the whole MMGW movement, and alleviate us from any such economically disasterous nonsense. Warren is a certified lefty, so that does indicate a certain degree of mental incompetence. If so, BH will be the next Enron. CTL does nothing for Carbon Emissions. If the Government goes with a Cap and Trade scheme, the railroads being a large carbon emitting entity versus several thousand small trucking companies, would be well placed to create a revenue stream by electrifying and then selling the unneeded carbon emissions to pay down the debt incurred. With any CO2 mitigation scheme, the most efficient fuel user will be affected the least, across land, that is the railroads. Transportation ranks right up there with power generation as a source of Carbon Emissions.
What CTL does is to transfer the burden of CO2 management from easy-to-regulate point sources to not-so-easy-to-regulate non-point sources, e.g. from one smokestack to a multitude of tailpipes. In a power plant, all the carbon is combusted and sent up the smokestack. In a CTL plant, most of the carbon is converted to liquid form, thus not a major source of CO2 until it is combusted in the vehicles.
One cannot sequester CO2 in vehicles. You can only try to make your vehicle more efficient in it's use of fuel.
And despite the pollyanna-ish outlook that a CO2 tax will cause a transfer of modal choice from trucks and autos to trains, the reality is that people will continue to drive their own cars despite the added costs, and it still takes trucks to get the goods from dock to dock. Remember? US railroads have all but stopped serving retail outlets. Do you really concieve of a future where railroads go back to the days of mostly carload consists? For that matter, do you really expect a capacity constrained industry to forgo the import intermodal in deference to more TOFC?
More than likely, a demand for greater trucking efficiency will lead to more liberal GVW allowances.
And of course, the most spectorial outlook for railroads from CO2 regulation is a reduction in coal hauling as the Eco Gestapo forces coal fired power plants to shut down. And what coal is produced for CTL will come from more readily available local sources currently out of vogue due to sulfer content. Gasification eliminates sulfer concerns, so there'd be less PRB coal and more Illinois coal used for these plants.
Coal is currently the lifeblood of the rail industry, accouting for 40% of the business and much of the higher R/VC ratio's. Thus there is an inherent contradiction for an investor to both desire greater CO2 regulation and put much of his egg collection in the railroad basket. The two ends do not mesh.
After all is said and done, Buffett's BNI involvement is more likely to mirror his Coca Cola experience than his insurance successes.
Does anybody know how many main line transcontinental tracks would be required to carry today's transontinental gross tonnage at 9 trains per day per line?
How about out of the Powder River Basin?
Anthony V.
futuremodal wrote:What CTL does is to transfer the burden of CO2 management from easy-to-regulate point sources to not-so-easy-to-regulate non-point sources, e.g. from one smokestack to a multitude of tailpipes. In a power plant, all the carbon is combusted and sent up the smokestack. In a CTL plant, most of the carbon is converted to liquid form, thus not a major source of CO2 until it is combusted in the vehicles. One cannot sequester CO2 in vehicles. You can only try to make your vehicle more efficient in it's use of fuel.
Aha a glimmer of light, you are correct it will drive more fuel efficiency. Let me ask you this how do you think that the Feds and States collect their Gas Tax? Not at the pumps for sure, that's too hard, they collect it at the refinery or pipeline terminal. It would be similar with a Carbon Tax, it doesn't matter whether the fuel came from Oil or Coal.
I don't expect much more passenger traffic on the rails in say the next 20 years. Some, but not large amounts. If you believe that coal will disappear from the rails then there will be additional capacity on the rails for other items, mostly containers, TOFC is Carbon inefficient too much tare.
That doesn't help much, more tires on the ground add to friction, it improves the tons per driver ratio, but that won't be the biggest concern. Lowering speeds will help, whether that happens depends on exactly what the speed premium is in dollars. When the speed premium gets too high the shippers will mitigate by other means.
Actually if Europe is an example the big power companies will close a few of the least efficient plants and then buy credits, passing the cost on to their customers.
Coal is currently the lifeblood of the rail industry, accouting for 40% of the business and much of the higher R/VC ratio's. Thus there is an inherent contradiction for an investor to both desire greater CO2 regulation and put much of his egg collection in the railroad basket. The two ends do not mesh.After all is said and done, Buffett's BNI involvement is more likely to mirror his Coca Cola experience than his insurance successes.
There you go again, here are the correct percentages to the nearest whole percent based on 2006 Revenues.
BNSF 20%
UP 20%
NS 25%
CSX 25%
Interesting that the Eastern Roads are more dependant on coal the the Western Roads. I don't think the Ag or Chemical shippers or UPS, share your view that coal is the most profitable for the rails.
AnthonyV wrote:Does anybody know how many main line transcontinental tracks would be required to carry today's transontinental gross tonnage at 9 trains per day per line?How about out of the Powder River Basin?ThanksAnthony V.
Anthony, 9 trains per day would be quite low, Currently you could say there are 9 tracks across the Rockies. When the UP completes their doubletracking of the Sunset Route there will be 10. In the PRB it varies, the busiest section south of Nacco Jct. is mostly triple tracked and sees about 80 trains per day, they are working on some 4th main track in this area. Slow speeds limit capacity here. BNSF and UP can push up to 80 trains per day across a 2 main track layout if you don't need many overtakes. i.e. all trains move at about the same speed.
Beaulieu:
Two pages ago, Michael discussed the optimum throughput as follows:
"The area of maximum profitability on the cost curve for a single track mainline is between 7 and 16 trains. Then costs start to go up and profitability declines.
Naturally, there happened to be a good statistical reason why the PCE was very profitable at 9 trains per day compared to its busier peers. "
These comments got me curious about actual traffic levels in tems of tonnange and number of trains on the main lines and how this compares to optimum levels discussed by Michael above.
How do actual traffic levels on the BNSF (or other western roads) main lines compare to optimum of 7 to 16 trains per day per track?
P.S. I haven't got the hang of the quote feature yet.
I have read several comments on this thread about Warren Buffett and Coca Cola and wish to expand that discussion just a bit, hopefully without getting off track of the railroad investment.
It has been stated there was a problem with Buffett and Coke, and I am not exactly sure what that problem was (is).
In checking several sources the last hour, I came up with the following:
BH began purchasing KO (Coca Cola) in the summer of 1988. The price at that time was in the $5 per share range. Eventually BH purchased 200,000,000 shares of KO for $1.023 billion or an average of $5.12 per share. Today that stock is at $49.88 and the market value of those shares is $9.976 billion, or an increase of over 900% which works out to a compounded return above 13% per year (isnt compound interest an incredible thing?). That does not include the dividend returns.
For example today's KO dividend is $1.24 per share or $248million. On BH's initial investment the dividend yield is 24% per year. Not bad, not bad at all.
Something happened to KO in 1998/1999. I dont know what it was as I owned no KO at that time. Earnings per share were $1.64 in 1997, falling to $1.42 in 98, $.98 in 99, and .88 in 00 before jumping back to $1.60 in 01. The stock price was around $90 in 1998 before dropping to the high $30's a couple of years ago and now is near $50.
What happened? I dont know nor can I find it.
However, what remains clear is BH's investment in KO has been sterling. By any definition it has to be considered a success. He identified a company which he felt was undervalued and he placed a large investment in that company.
Michael has several times wondered if BNSF is such a great investment at $80, why not at $60 or $40? Here are a few of the reasons Buffett made his KO investment in 1988 rather than earlier, even tho the stock was moving upward:
1. He was attracted by the management changes implemented by Robert Goizaeta.
2. Goizaeta implemented an attitude of initiating action rather than reacting to market conditions.
3. KO's profit margins increased from 12.9% in 1980 to 19% by 1988.
4. The ROE had reached 31%
He actually resisted purchasing KO earlier, thinking it was overvalued, but the continued success of Goizaeta changed his mind on the valuation.
Today KO is seeing improved operating and growth results. The company is extremely profitable.
In looking at the four reasons above that Buffett did not purchase KO earlier, one can insert BNSF's current situation in each of those items:
1. Matt Rose has managed BNSF very well. Rob Krebs before him laid a strong foundation.
2. Krebs and Rose have "initiated" rather than "reacted" to the Transcon expansion. Compare BNSF's situation with that of UP's Sunset Route, as they are years away from completion.
3. Profit margins have been increasing...earnings before taxes have increased from 11% to 20% over the past three years.
4. ROE has improved from 8.5% to 18% over the same period.
Will BNSF become as successful as KO? Tune in. It is so easy to peer thru the rear view mirror when discussing successes (and failures) of investing. Coca Cola has been a huge success for BH. The initial investment throws off 1/4 BILLION dollars a year to BH ($250,000,000).
Ed, you misread my comments on Coca Cola. The investment reference was in comparison to Pepsico.
I did not say Coca Cola did poorly or that there was a "problem" at Coke, although he did leave the board and Coca Cola did poorly by comparison to Pepsico over the time period that Buffett was on the Coca Cola board. "Poorly by comparison" is not the same thing as saying "poorly."
I did not say he did not make money on Coca Cola. I do not know where your read that.
Ed, this is cheerleading. Most Fortune 500 companies are far more profitable now than (take your pick) 5, 10, 15 years ago.
Including railroads.
Michael:I am not going to go back and read every post made on this thread, but I did "feel" that some of your comments regarding Coke were not completely supportive of BH/KO investment. Has Pepsi outperfomed KO lately? Probably...I havent checked Pepsi's financials as I already own KO and will not invest in both. Perhaps I should check both out and make sure I am in the right investment.
I seriously dont know what happened to KO back in the late 90's. You did make mention in one of your posts that Buffett left the board. You might want to go back and read your comments on that, as I interprated your statement to be there were problems while he was on duty.
Dave made a comment this evening comparing Buffett's experience with KO and with insurance and I took that as being slightly negetive towards the KO investment, so I checked things out.
As it has turned out, the investment has been good, very good. As I previously stated, the dividend yield on original investment is over 24%. Granted the stock tanked, but one could say that a PE ratio in the 50's usually results in a correction. Expectations usually cannot continue to be met and in this case, it occured. One could say now with a forward PE of 20, 2.5% dividend yield, 21% margins, and ROE of 30% that KO is an interesting equity. Growth is slow, but steady for a mature company, but it prints cash.
You mentioned earlier the amount of cash BH has held...could you comment on your thoughts behind those numbers, if any...or are those just factual numbers. Buffett has indicated that he doesnt necessarily like to hold cash, but will not invest simply to be fully invested. I do know that he has commented on the difficulty in finding worthwhile investments.
BH will be facing a cash problem, if not already. What to do with their cash...as the company becomes larger and throws off more and more cash thru the insurance float and the operations results, what will they do with the cash? As you know, BH has not issued a dividend since Buffett has been CEO. Lately he has turned overseas to invest. I dont know if he has invested in Asia, but as I mentioned earlier, this might be a play on both energy and Asia.
Dont get too ruffled about anything I write here...there is no agenda and you will know when I disagree, but it will not be in the form of name calling.
Cheerleading?
I dont understand that statement at all. Just stating the data, as you like to request.
Anthony:Dont feel too bad, I havent figured out the quote thing either. Perhaps someone could explain it to me again.
AnthonyV wrote:Beaulieu:Two pages ago, Michael discussed the optimum throughput as follows:"The area of maximum profitability on the cost curve for a single track mainline is between 7 and 16 trains. Then costs start to go up and profitability declines.As we discussed earlier on the thread, once past that optimum, profit still increases, but marginal costs increase still faster and that is why profitability declines.Naturally, there happened to be a good statistical reason why the PCE was very profitable at 9 trains per day compared to its busier peers. "These comments got me curious about actual traffic levels in tems of tonnange and number of trains on the main lines and how this compares to optimum levels discussed by Michael above.How do actual traffic levels on the BNSF (or other western roads) main lines compare to optimum of 7 to 16 trains per day per track?ThanksAnthony V.P.S. I haven't got the hang of the quote feature yet.
All of the mainlines, are above that figure in places, The UP through Wyoming is all doubletrack. The BNSF transcon is very close to being all doubletrack, just two short bottlenecks. Michael's 16 trains per day is a simplified figure, based on directional balance. It assumes fairly long running times between sidings and short sidings. Don't forget that if you have even spacing and no need for overtakes each traincrew will only make 4 meets, during their time. Doubletrack changes things quite a bit.
John Beaulieu
AnthonyV wrote: P.S. I haven't got the hang of the quote feature yet.
Murphy Siding wrote: AnthonyV wrote: P.S. I haven't got the hang of the quote feature yet.Anthony: To quote someone, go to the thread you want to quote. Push the "quote" button at the upper right. This will jump you to a different screen, where the other person's post is written. Scroll down to the bottom, past the word "quote", and write your comment. When you're done, hit "post". There is a test forum available. That's where I had to practice about a hundred times, in order to get the hang of it. That was in addition to a half dozen helpful people trying to coach me. Some posters can do multiple quotations from a single post. I'm not that smart.
Like this?
omg...it worked!
beaulieu wrote: Michael's 16 trains per day is a simplified figure, based on directional balance. It assumes fairly long running times between sidings and short sidings.
A sensitivity analysis on the effect of the number of sidings in a 120 mile division (which directly affects the running time between sidings), comparing distances between sidings for 12 miles, 10, 8, 5, and 4 miles shows little change to economic optimums, but there is a substantial correlation to capacity, as one might guess. The sidings exceed the maximum train length in all cases, so the model is a bit on the optimistic side.
MP173 wrote: Murphy Siding wrote: AnthonyV wrote: P.S. I haven't got the hang of the quote feature yet.Anthony: To quote someone, go to the thread you want to quote. Push the "quote" button at the upper right. This will jump you to a different screen, where the other person's post is written. Scroll down to the bottom, past the word "quote", and write your comment. When you're done, hit "post". There is a test forum available. That's where I had to practice about a hundred times, in order to get the hang of it. That was in addition to a half dozen helpful people trying to coach me. Some posters can do multiple quotations from a single post. I'm not that smart.Like this?omg...it worked! ed
MichaelSol wrote: beaulieu wrote: Michael's 16 trains per day is a simplified figure, based on directional balance. It assumes fairly long running times between sidings and short sidings. A sensitivity analysis on the effect of the number of sidings in a 120 mile division (which directly affects the running time between sidings), comparing distances between sidings for 12 miles, 10, 8, 5, and 4 miles shows little change to economic optimums, but there is a substantial correlation to capacity, as one might guess. The sidings exceed the maximum train length in all cases, so the model is a bit on the optimistic side.
I was thinking in comparision to the way that the CP(Soo) now has the former MILW between St. Paul, MN and Portage, WI. 2.5 to 3 mile long sidings, separated by 10-12 mile long single-track sections, trains between 6,000 and 9,000 ft. long. Train speed of 50 for regular freights, 60 mph for IMs, 70 to 79 for Amtrak, subject to curves etc.
MP173 wrote: I seriously dont know what happened to KO back in the late 90's. You did make mention in one of your posts that Buffett left the board. ... Granted the stock tanked ...
I seriously dont know what happened to KO back in the late 90's. You did make mention in one of your posts that Buffett left the board. ... Granted the stock tanked ...
The Coke Pepsi battle is currently all the rage in business schools as a case study; How did Pepsi win? Buffet left the Board as Coke fell behind Pepsi, for the first time in history. Why? I don't know. But, Coke was touted by Buffett himself as a buy he was particularly proud of -- to the extent of going on the board. Maybe he got bored.
The question it raised for me is not whether Coke "did good," but that selection of companies for value necessarily compares each company with other companies in the same market, presumably with the idea of selecting the "best" company.
It took Pepsi 20 years, but it did it. It did a better job than Coke. Coke was punished in the stock market, yes. The stock market reflects value appreciation, or depreciation as the case may be.
That doesn't mean it didn't make money; it means that there was a better choice, or Pepsico did something better. And Buffett was in the management at the other place.
In that particular instance, a blind follower of Buffett would have done OK (and how many companies did OK over the last 15 years? Tons), or even very well, if the results are not compared with other leaders in that industry. But that's not really the measure of astute investing, is it?
And the point was simply cautionary. To assume every move is brilliant, and to thereupon ascribe each reader's pet favorite company strength to Buffett's decision making process, may not always overestimate Buffett, but it can in fact overestimate the company involved because, in essence, he is attempting to predict the future, and he would be the last to claim infallability.
You mention above that it's so easy to use hindsight. Buffett uses past performance to try and predict the future and he is one of the most rigorous analysts of past performance.
I don't think analysis of past performance is easy, but I do believe that measured hindsight is crucial to the outcome of the investing process.
beaulieu wrote: MichaelSol wrote: beaulieu wrote: Michael's 16 trains per day is a simplified figure, based on directional balance. It assumes fairly long running times between sidings and short sidings. A sensitivity analysis on the effect of the number of sidings in a 120 mile division (which directly affects the running time between sidings), comparing distances between sidings for 12 miles, 10, 8, 5, and 4 miles shows little change to economic optimums, but there is a substantial correlation to capacity, as one might guess. The sidings exceed the maximum train length in all cases, so the model is a bit on the optimistic side.I was thinking in comparision to the way that the CP(Soo) now has the former MILW between St. Paul, MN and Portage, WI. 2.5 to 3 mile long sidings, separated by 10-12 mile long single-track sections, trains between 6,000 and 9,000 ft. long. Train speed of 50 for regular freights, 60 mph for IMs, 70 to 79 for Amtrak, subject to curves etc.
These would be pretty standard for modeling purposes; the speed limits can't be used, as the models incorporate average running speed between sidings. The standard models are pretty close to the truth for something like you describe, since the parameters are reasonably uniform and can be entered without modification. The usual process is to go out with the stopwatch and sample the trains, train size, etc., and come back in with the average time spent on sidings, how long it takes to get out, average speed to the next siding used, etc. and fit those into a specific model built from the specific track profile.
jeaton wrote:I assume that the model is attempting to forecast the effect of changes in volume of traffic to unit cost. Do you have specific studies that compared the forecast to actual results?
Personally, I've got some CN studies that look at that, but the basic model is taken from Ernest Poole, probably the single most authoritative source on railroad cost analysis, and he in turn does cite studies. As I recall, he was director of Transportation Research at Southern Pacific. His book, "Railroad Cost Analysis," remains useful to this day.
MichaelSol wrote: The Coke Pepsi battle is currently all the rage in business schools as a case study; How did Pepsi win? In that particular instance, a blind follower of Buffett would have done OK (and how many companies did OK over the last 15 years? Tons), or even very well, if the results are not compared with other leaders in that industry.
The Coke Pepsi battle is currently all the rage in business schools as a case study; How did Pepsi win?
In that particular instance, a blind follower of Buffett would have done OK (and how many companies did OK over the last 15 years? Tons), or even very well, if the results are not compared with other leaders in that industry.
Well, lets see if I can cut and paste a little or if last night was an illusion. For those of you that dont know, last night was the first time in 4 years that I actually used the quote function correctly.
No doubt the business schools have been busy studying the Pepsi challenge. My guess is they have also been busy studying the Warren Buffett/Charlie Munger challenge which is how does one investment yield such a high return over such a long time? Just what is their secret?
I went back and checked how BH did against the S&P500, which is the standard which large cap investments are measured against. I chose 1988, since that was the year BH purchased KO, but if you want, I can go back to any year.
Lets say you invested $10,000 in BH and $10,000 in Vanguard's S&P500 Index fund. By the end of 2006 the BH stock would have been worth $284119. The S&P500 would have been worth $88552.
Look at those numbers again. $284119 vs $88552. To say those that invested with Buffett would have done OK is like saying John Wooden did "OK coaching UCLA during the 60's and 70's" .
I dont know how else to say this. Buffett/Munger have done a phenominal job. Moreover, they have done it in an ethical upfront manner.
BTW, the Vanguard funds are considered the best overall group of mutual funds in the industry based on their low cost indexing principals. John Bogle and Warren Buffett, while having different styles are two men that changed the entire investment industry for the better.
Now, having said all that...BH future returns are certainly not guaranteed to outperform the market in the future.
Come to think of it...perhaps I am cheerleading. I like to think of it as admiration and respect, but I might be carrying the pom poms.
MP173 wrote: Lets say you invested $10,000 in BH and $10,000 in Vanguard's S&P500 Index fund. By the end of 2006 the BH stock would have been worth $284119. The S&P500 would have been worth $88552.
Whoa there, I was talking about the choices made between Coke and Pepsi; as a "CAUTIONARY" note, not BH's overall returns. I did not, ever, state that BH did not generate good, great, or even phenomenal returns, and I am not sure why you are working so hard to put my remarks in that context, which is completely different than the specific point I made, for which I even used the words, "in that particular instance ...".
Thanks for the tips on the quote feature guys - I'll have to work on it.
Back to Buffet
If we were advising Buffet and BNSF and assuming the BNSF is over capacity (i.e., beyond the economic optimum), what would our advice be?
Would we advise a cut in capacity and if so how much?
Would we advise construction of new main line tracks and if so how much track and at what cost?
How would these alone or in combination affect the short and long term bottom line quantitatively, not qualitatively?
Maybe Michael could answer this: Why would Buffet and BNSF wait for a downturn to reduce traffic? Why not just eliminate some of the traffic immediately to improve their rate of return?
I'm not trying to argue here and I don't have any answers. I have never worked in the railroad industry. To me, a railroad the size of BNSF is an extremely complex network, one that I couldn't even begin to think about how to optimze.
"In that particular instance, a blind follower of Buffett would have done OK..."
Yes, plenty of investments did "OK".
I am not sure here what you are trying to say, nor am I putting words in your mouth. If we are still splitting hairs over Coke vs Pepsi...then I am moving on. Also done defending WB and BH here...he certainly doesnt need me...
beaulieu wrote: futuremodal wrote: What CTL does is to transfer the burden of CO2 management from easy-to-regulate point sources to not-so-easy-to-regulate non-point sources, e.g. from one smokestack to a multitude of tailpipes. In a power plant, all the carbon is combusted and sent up the smokestack. In a CTL plant, most of the carbon is converted to liquid form, thus not a major source of CO2 until it is combusted in the vehicles. One cannot sequester CO2 in vehicles. You can only try to make your vehicle more efficient in it's use of fuel.Aha a glimmer of light, you are correct it will drive more fuel efficiency. Let me ask you this how do you think that the Feds and States collect their Gas Tax? Not at the pumps for sure, that's too hard, they collect it at the refinery or pipeline terminal. It would be similar with a Carbon Tax, it doesn't matter whether the fuel came from Oil or Coal.
futuremodal wrote: What CTL does is to transfer the burden of CO2 management from easy-to-regulate point sources to not-so-easy-to-regulate non-point sources, e.g. from one smokestack to a multitude of tailpipes. In a power plant, all the carbon is combusted and sent up the smokestack. In a CTL plant, most of the carbon is converted to liquid form, thus not a major source of CO2 until it is combusted in the vehicles. One cannot sequester CO2 in vehicles. You can only try to make your vehicle more efficient in it's use of fuel.
I worked in petroleum retail for a few years, and yes the feds and states collect the fuel tax at the retail level. There are a few states that have started collecting fuel taxes from the distributors in reaction to some Indian tribes that decided (with the federal courts' blessing) they no longer need to collect the state tax at tribal gas stations.
And despite the pollyanna-ish outlook that a CO2 tax will cause a transfer of modal choice from trucks and autos to trains, the reality is that people will continue to drive their own cars despite the added costs, and it still takes trucks to get the goods from dock to dock. Remember? US railroads have all but stopped serving retail outlets. Do you really concieve of a future where railroads go back to the days of mostly carload consists? For that matter, do you really expect a capacity constrained industry to forgo the import intermodal in deference to more TOFC?I don't expect much more passenger traffic on the rails in say the next 20 years. Some, but not large amounts. If you believe that coal will disappear from the rails then there will be additional capacity on the rails for other items, mostly containers, TOFC is Carbon inefficient too much tare.
Let us not put so-called "carbon efficiency" ahead of overall supply chain efficiency! The buck literally stops at the latter.
TOFC is more efficient than COFC or bi-modal, if it is the one way to get trucking outfits to ship their boxes by rail. Sure, JB Hunt and a few other outfits are big into the domestic container, but most trucking outfits prefer the dry van. If the railroads want their business, they need to cater it in a way the customer perfers, not how the railroad beancounters prefer.
That is real efficiency!
More than likely, a demand for greater trucking efficiency will lead to more liberal GVW allowances.That doesn't help much, more tires on the ground add to friction, it improves the tons per driver ratio, but that won't be the biggest concern. Lowering speeds will help, whether that happens depends on exactly what the speed premium is in dollars. When the speed premium gets too high the shippers will mitigate by other means.
Again, if it improves ton/mile efficiency, it does help very much. And per my comments on real efficiency, lowering speeds will end up hurting the economy. We live in a time sensitive economy, "just in time" is the primary driving force in the consumer market.
Again, try not to think in terms of throwing the economic baby out with the carbonated bath water.
And of course, the most spectorial outlook for railroads from CO2 regulation is a reduction in coal hauling as the Eco Gestapo forces coal fired power plants to shut down. And what coal is produced for CTL will come from more readily available local sources currently out of vogue due to sulfer content. Gasification eliminates sulfer concerns, so there'd be less PRB coal and more Illinois coal used for these plants.Actually if Europe is an example the big power companies will close a few of the least efficient plants and then buy credits, passing the cost on to their customers.
You are aware that the average European electric bill is larger than that for the American equivalent? Again, what is gained by all these cost increases? How is that "greater efficiency"? It cannot be quantified on the positive side, only on the negative side. I think most average folks equate "greater efficiency" with lower costs, yet all the examples you've put forth so far go in the opposite direction. Eventually the average joes are gonna figure it out......
Coal is currently the lifeblood of the rail industry, accouting for 40% of the business and much of the higher R/VC ratio's. Thus there is an inherent contradiction for an investor to both desire greater CO2 regulation and put much of his egg collection in the railroad basket. The two ends do not mesh.After all is said and done, Buffett's BNI involvement is more likely to mirror his Coca Cola experience than his insurance successes.There you go again, here are the correct percentages to the nearest whole percent based on 2006 Revenues.BNSF 20%UP 20%NS 25%CSX 25%Interesting that the Eastern Roads are more dependant on coal the the Western Roads. I don't think the Ag or Chemical shippers or UPS, share your view that coal is the most profitable for the rails.
Coal represents 21% of revenues and 44% of ton miles. On BNSF it represents 57% of ton miles. Your claim that intermodal can replace coal misses out on a few important points, mainly that the coal lines are removed from the main intermodal corridors. We also have seen BNSF's investor reports - coal and ag are the biggest money makers, import intermodal the
AnthonyV wrote: Why would Buffet and BNSF wait for a downturn to reduce traffic? Why not just eliminate some of the traffic immediately to improve their rate of return?
Why would Buffet and BNSF wait for a downturn to reduce traffic? Why not just eliminate some of the traffic immediately to improve their rate of return?
BNSF is a common carrier.
MichaelSol wrote: AnthonyV wrote: Why would Buffet and BNSF wait for a downturn to reduce traffic? Why not just eliminate some of the traffic immediately to improve their rate of return?BNSF is a common carrier.
So BNSF or any other railroad has to accept any and all traffic?
AnthonyV wrote: If we were advising Buffet and BNSF and assuming the BNSF is over capacity (i.e., beyond the economic optimum), what would our advice be?
Over capacity is not beyond economic optimum; capacity is a physical measurement under a specific set of parameters. It is not related to an economic measurement.
And economic optimum is not necessarily an ideal under all circumstances -- simply that economic risk increases beyond economic optimum (or below it for that matter), and there can be reasons to take risk, intelligently made.
MichaelSol wrote: AnthonyV wrote: If we were advising Buffet and BNSF and assuming the BNSF is over capacity (i.e., beyond the economic optimum), what would our advice be? Over capacity is not beyond economic optimum; capacity is a physical measurement under a specific set of parameters. It is not related to an economic measurement.And economic optimum is not necessarily an ideal under all circumstances -- simply that economic risk increases beyond economic optimum (or below it for that matter), and there can be reasons to take risk, intelligently made.
????
Yikes! I was thinking of buying a couple. I know that's very inefficient, but I'm a BNSF fan. And I'd be able to say they work for me when "Resource Protection" calls and reminds me about their strict no trespassing rules.
Now the price has shot up.
I meant to ask about reducing traffic, not capacity, in my earlier post.
As far as being a common carrier, what doses this actually mean? Does this force the railroad to accept any and all traffic in such a way that the RR has to run say 20 trains per day over a line when it would prefer to run say only 16? Could the RR tell the shippers we are only going to run our at economic optimum of 16 trains per day rather than our previous 20 and therefore your shipment will take longer to get wherever it's going? Does being a common carrier remove any decision making regarding trains per day on a given line from the railroad?
Well, common carrier means they have to provide a rate. The key there is "a rate."
Like all businesses, railroads operate in a political environment. A railroad can't just up and announce, "we are not going to carry coal anymore" or something like that, or set a rate too high for it to be realistically carried.
MichaelSol wrote: Well, common carrier means they have to provide a rate. The key there is "a rate."Like all businesses, railroads operate in a political environment. A railroad can't just up and announce, "we are not going to carry coal anymore" or something like that, or set a rate too high for it to be realistically carried.
It doesn't have to be draconian - can't the railroad announce gradual service cuts over time, 20 trains to 19 to 18 to 17 etc.?
Don't common carriers make service cuts and other adjustments to their service all the time?
Is a bus company a common carrier (e.g., Greyhound etc.)? If so does a bus company have to provide me a bus if I show up to the bus terminal and the next scheduled bus is full? Or do they tell me to wait for the next bus?
All I'm trying to get a handle on is where the railroads are operating relative to the economic optimum you brought up a while back. My earlier post was intended to gain some insight on how you and others who are knowledgeable about RR would advise BNSF on their operations to improve their economic position.
AnthonyV wrote:All I'm trying to get a handle on is where the railroads are operating relative to the economic optimum you brought up a while back. My earlier post was intended to gain some insight on how you and others who are knowledgeable about RR would advise BNSF on their operations to improve their economic position.
Well, BNSF is investing to expand line and yard capacity -- those are intended to reduce congestion and improve profitability. I don't think BNSF needs advice on the topic at this point -- these projects just take time and money. How they got there, now that's another question, but they are pretty much doing now what they need to do now.
MichaelSol wrote: AnthonyV wrote:All I'm trying to get a handle on is where the railroads are operating relative to the economic optimum you brought up a while back. My earlier post was intended to gain some insight on how you and others who are knowledgeable about RR would advise BNSF on their operations to improve their economic position. Well, BNSF is investing to expand line and yard capacity -- those are intended to reduce congestion and improve profitability. I don't think BNSF needs advice on the topic at this point -- these projects just take time and money. How they got there, now that's another question, but they are pretty much doing now what they need to do now.
I guess Greyhounds and the other guys are right - Buffet is on to something positive about the BNSF.
AnthonyV wrote: MichaelSol wrote: AnthonyV wrote:All I'm trying to get a handle on is where the railroads are operating relative to the economic optimum you brought up a while back. My earlier post was intended to gain some insight on how you and others who are knowledgeable about RR would advise BNSF on their operations to improve their economic position. Well, BNSF is investing to expand line and yard capacity -- those are intended to reduce congestion and improve profitability. I don't think BNSF needs advice on the topic at this point -- these projects just take time and money. How they got there, now that's another question, but they are pretty much doing now what they need to do now. I guess Greyhounds and the other guys are right - Buffet is on to something positive about the BNSF.Anthony V.
Since no one said there wasn't "something positive", I had already gathered you weren't really interested in gaining "some insight", but were looking for something to argue about unless you heard what you wanted to hear.
And sure enough ...
MichaelSol wrote: AnthonyV wrote: MichaelSol wrote: AnthonyV wrote:All I'm trying to get a handle on is where the railroads are operating relative to the economic optimum you brought up a while back. My earlier post was intended to gain some insight on how you and others who are knowledgeable about RR would advise BNSF on their operations to improve their economic position. Well, BNSF is investing to expand line and yard capacity -- those are intended to reduce congestion and improve profitability. I don't think BNSF needs advice on the topic at this point -- these projects just take time and money. How they got there, now that's another question, but they are pretty much doing now what they need to do now. I guess Greyhounds and the other guys are right - Buffet is on to something positive about the BNSF.Anthony V.Since no one said there wasn't "something positive", I had already gathered you weren't really interested in gaining "some insight", but were looking for something to argue about unless you heard what you wanted to hear.And sure enough ...
Sorry, but I didn't mean my previous post to be taken that way. Somehow things normally said in a face-to-face conversation seem more confrontational when in writing.
I found your and Bob's comments regarding capacity and traffic facinating. I was surprised at the low number of trains needed for maximum profitablility.
However, while others were praising Buffet's purchase of BNSF as a signal he sees something positive as to where the railroad was headed, your position (maybe I'm mistaken) was that Buffet was probably betting on a downturn in the economy to reduce low-margin trafiic and congestion, resulting in moving the railroad closer to the economic optimum.
I have no idea how many trains actually run on the transon tracks or how many tracks there actually are. I am always receptive to discussions about railroad operations, so I was curious as to where the railroad is now vs the economic optimum and what would needed to be done to get BNSF closer to it, in terms of reducing trains or adding track.
Your response was that "they are pretty much doing now what they need to do now" to "relieve congestion and improve profitability."
Conceptually I understand whe Buffet might hope for a downturn BNSF wasn't doing anything to relieve congestion. However, I don't understand why Buffet would hope there is downturn if in fact they are already making the investments to relieve congestion and improve profitability, as you stated.
AnthonyV wrote:However, while others were praising Buffet's purchase of BNSF as a signal he sees something positive as to where the railroad was headed, your position (maybe I'm mistaken) was that Buffet was probably betting on a downturn in the economy to reduce low-margin trafiic and congestion, resulting in moving the railroad closer to the economic optimum.
And my point was that certain strong points offered were in place quite some time ago, and if those were the specific motivating factors, Buffett was pretty late to the game. I don't happen to think he was. That does not say the factors were not strong points nor that Buffett does not know what he is doing, nor that he did not make a gadgillion dollars from investing, nor that Charlie Munger isn't a smart guy. It says the opposite, and somehow, as usual, "nuance" seems to be missing from these threads, foreclosing reasonable discussion.
I could see that was what you wanted to hear, and your response confirmed it.
I didn't say he was "hoping" for a downturn. I said there was good reason for him to expect that BNSF would be a good performer in a downturn. There is no point in repeating what I have already stated in some detail only to offer some new way of misinterpreting and distorting it.
MichaelSol wrote: Is Buffett betting on a downturn? Well, I think he has to be.
Maybe I'm wierd, but whenever I bet on something I usually hope it happens.
AnthonyV wrote: MichaelSol wrote: Is Buffett betting on a downturn? Well, I think he has to be.Maybe I'm wierd, but whenever I bet on something I usually hope it happens.Anthony V.
This is why I see no point in repeating myself. To take the time to look up my comment, see what it says, and then spin it differently anyway seems to be a pervasive hobby on these threads. Good day.
This raises a question (in my mind, at any rate): is it possible to simply price discriminate? Or is the nature of a lot of the carried loads (coal, for example) such that a slight rise in price would cause a significant drop in the loads carried, producing a lower total profit?
I fail to see any nuance in your position at all.
My take from the discussion is as follows:
The position of some of the other guys is that Buffet sees the BNSF as a sound investment outright over other stocks due to the positive things the railroad is doing..
Your position is that the positive things that the railroad is doing were always there and that Buffet is buying the stock at a price the already reflects the positives, so there must be another reason. That reason is he expecting a downturn in the economy, and BNSF performance will improve because the loss of traffic will lead to higher profitability due to the whole operating curve phenomenon.
I apologize in advance if I misrepresented your or anyone else's position.
I am a numbers man like you are, and independent of anyone's position, the questions that naturally enter my mind after reading the material in this thread are as follows:
What number of trains are operating per day on the main lines on BNSF and other railroads?
How many main line tracks are there?
Where are the RR's operating currently relative to the economic optimum?
How many tracks would be needed to reach the economic optimum point?
Or, what reduction in the number of trains, tonnage, and gross revenue would be required to reach the optimum point? How about in terms of percentages?
What would prohibit Buffet & BNSF deciding to operate at the economic optimum point rather than waiting for a downturn?
I was hoping that cumulative knowledge all those who participate could shed some light on this.
I'm sorry if I offended you.
Good day.
Here's a request directed to Michael & greyhound as well as LC & FM...
First, be respectful of one another. Stop the personal attacks.
Next, at some point you're going to have to agree to disagree on certain subjects. This beating a dead horse routine is really getting old, and I'm sure I'm not the only person who feels that way. It's very tiresome.
Please, try to get along.
Thanks - Bergie
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