Warren Buffet, the Guru has done it again. This time round its increasing his stake in the Railways.
He took a stake earlier (22%) and now completely bought over Burlington Northern Santa Fe, the second-largest railroad company in US for $34 Billion @ $100 per share, at 30% premium on Monday’s closing price.
He bet on the future of Railways earlier when he took stake in Burlington – 22%, Union Pacific 2%, Norfolk Southern – less than 1%. Now with the biggest ever purchase by Berkshire Hathaway, he has gone the whole hog. ( Before this, the biggest acquisition was the $16 billion purchase of General Re in 1998).
Salient Features of the investment -
# It’s a major wager on the health, strength and future of the US economy.
# It’s a stake in the industry which hauls everything big & small, commodities to consumer products to heavy machines. Growth will mean more haulage both for export of crop produce, imports from all over, Coal for energy etc.
# The railways make economic sense and thus are being increasingly preferred, as the prices of oil remain firm given its limited availability. To put into context , one train roughly hauls 280 odd trucks.
# Captive consumption – Berkshire already owns major utilities which rely on coal.
# Moat – After consolidation the current rail road industry in US is a virtual monopoly with major deterrents for new entrants, so a perfect Buffet moat.
# Proxy investment into Coal & energy - Rather than buying expensive coal mines, he bought into the Coal logistics as the Coal fired plants grow so will the use of railroad for its supplies. Nine new plants have been approved & 25 are under const. for a total 15,000 MW.
# Why Burlington – Another Buffet principal , always go for companies having strong managements. It has a strong management team which deployed technology, consistently improved efficiency and cut costs to make it more profitable.
# Timing and Price - The investment was made at almost the bottom when the company reported much lower volumes consequent 30% drop in profits. The things are not going to get any worse.
Summing up, current fundamentals may look weak and shares fully priced but when one peeps into the future both near & distant, this will turn out to be one great investment.
