After Warren Buffet decided to add the majority remainder of Burlington Northern Santa Fe (NYSE: BNI) to his Berkshire Hathaway (NYSE: BRK.A) fund about a month ago, some criticisms and negative fallout didn't take long to materialize. Lead-ins like "Berkshire May Lose AAA Rating On Burlington Buy", "Burlington Bet Could Derail Berkshire", and my favorite, "Has Buffet Lost His Mind?" made a pretty clear statement that some investors (albeit a minority) thought Buffett was losing his touch - or at least his discipline.

IN PICTURES: World's Greatest Investors

I understand the criticisms. I really do. When the guy calling the shots says the acquisition was "not a bargain", and when a principal commodity the railway hauls - coal - is apparently on its way out, you have to wonder if he's just trapped in the 20th century.

After the November 13 interview with Charlie Rose, though, and after some due diligence on the industry, I think Omaha's oracle is still as savvy as ever.

A Tale Of Two Industries
The chief concern regarding Burlington - and for all rail companies - is coal. It's dirty and politically unpopular. Lawmakers are mulling legislation that could limit the amount of coal that can be burned to produce energy (part of the cap and trade argument).

How bad would it hurt? Coal accounts for 40% of rail volume and 20% of rail revenue nationwide. Needless to say, that's a big chunk of money for the rail industry. The number, however, doesn't explain a key transition going on within the industry's customers right now.

There are two basic branches of rail transportation - intermodal and carload. Carloads are generally used to transport commodities in a boxcar, strapped to a flatbed, or dumped into a rolling bin that hauls the materials for later use as part of a manufacturing process. Coal is an example - consumers don't buy it, but factories need it to manufacture things consumers do buy.

"Intermodal" describes the transportation of finished goods. Trailers full of goods that can rest on a flatbed and also be hauled on the road by a truck are, in essence, intermodal transportation.

Intermodal Rebound
That's an important distinction to make, as it sets up a couple of key data points about rail shipping activity in the United States:

  • Commodity carload counts are up about 10% since May, but they were sequentially down in September and October.
  • Intermodal container counts are up 13% since May and were up every month since July.

That's the strongest May-October intermodal rebound we've seen since at least 2006, and it points to a very encouraging trend, particularly for intermodal plays. And, some analysts feel that it was indeed the recovery move.

Now, care to guess which railroad's been building its intermodal business like crazy? Burlington Northern Santa Fe.

As it stands right now, intermodal/consumer product shipping makes up about 35% of Burlington's total revenue, whereas coal makes up about 22% of the company's revenue (but make no mistake - access to coal and cheap shipping helps Buffett's utility holdings).

Weaning Off Coal
In the Charlie Rose interview, Buffett specifically acknowledged the country was going to wean itself off coal. He also realizes it's not going to happen overnight, or over a decade for that matter - 40% of the country's power is made by coal. Even as coal approaches obsoleteness, though, the lack of need for coal transportation will have a minimal impact on BNI's business since it doesn't rely heavily on coal revenue. Indeed, the growing need to ship finished goods - cheaply - will only grow in time, which is right up Burlington's intermodal alley.

Perhaps Mr. Buffett is more in touch with the shape of things to come than any of us gave him credit for. More importantly:

Best Of The Best
While the Burlington background is fascinating, it's also irrelevant - you can't buy BNI now and expect to make any money. Burlington's not the point, though. Similar opportunities exist with several outstanding rail names that are effectively following in Burlington's intermodal footsteps.

  • Canadian National Railway (NYSE: CNI) - Intermodal is the biggest single piece of the revenue pie at 20%, while coal makes up only 6%.
  • Union Pacific (NYSE: UNP) - The intermodal/coal mix is about 18%/24% of total revenue. It's probably the most troubling of the three stocks in that regard, but it's a very well-managed company that is in the habit of topping EPS estimates.
  • Canadian Pacific (NYSE: CP) - Grain shipping (another railway hot spot) and intermodal are tied at 27% of total revenue; coal makes up 11% of total revenue.

Bottom Line
A strong intermodal business and lack of coal liability may not prove tremendously beneficial in the very foreseeable future, but I trust the Oracle's insight about the rail industry's long-term growth - whether or not coal goes away. (To learn more, see Warren Buffet: How He Does It.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  5. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  6. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  7. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  8. Stock Analysis

    If You Had Invested Right After Berkshire Hathaway's IPO (BRK.A)

    Learn how much you would now have if you had invested right after Berkshire Hathaway's IPO, and find out the classes of shares that you could invest in.
  9. Economics

    How Warren Buffett Made Berkshire A Winner

    Berkshire Fine Spinning Associated and Hathaway Manufacturing Company merged in 1955 to form Berkshire Hathaway.
  10. Investing News

    What Does the Fire Monkey Mean for Your Portfolio?

    The Chinese new year this year corresponds to the monkey, a quick-witted, playful, tricky figure that means well but has a penchant for causing trouble.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center