BNSF has the best end-to-end rail network in the country. They spent big $$ improving infrastructure when others like the CSX were dawdling with their logistical systems (does anyone remember the backlogs and delays in TX and AL during the early 2000's that required federal intervention?)
The hidden gem in this deal is the investment BNSF made in laying 24cnt fiber next to their track in continuous 4" pvc. I've always felt the decision to do that was a reflection on just how well-run the BN was as a company.
Large-scale packets on the rails, small-scale packets in the pipe.
Berkshire Hathaway doesn't just invest in well-run companies. It invests heavily in the management of well-run companies.
Buffett's bet is not on management, its on the dollar losing value b/c its being printed like mad to meet gov't obligations and it losing its place as the reserve currency.
Railroads can haul a ton of goods about 400 miles with one gallon of diesel. When the dollar devalues and gas goes to $5-$10+ per gallon, we will be reminded once again why he is the Oracle of Omaha.
Buffett has talked about coming inflation in his last two or three annual letters to shareholders. When we start having 10% annual inflation, the p/e on this deal will get better and better.
I have to disagree, Buffett doesn't trade macro--he trades value. The (alleged) dollar devaluation may have been included in his analysis, but that's not the underlying rationale behind the trade.
Question: What is your latest outlook on the dollar given what's been thrown up in the air in the last 6 months?
Buffett: It's pretty unpredictable. I guarantee you the dollar will buy less 10-20 years from now. But we are doing things that will hurt the purchasing power of the dollar. On the other hand the same thing is happening in different countries around the world. The British will run a deficit of 12 and a fraction percent of GDP. Even the Germans will run a deficit of 6 and a fraction GDP. You've got governments around the world all electing to run very material deficits. Electiing to do that to offset the contraction demand. How that plays out in relative exchange rates - I can't tell you. In terms of currency's purchasing power in the future - it's going to cause units of currency to buy a lot less.That isn't gonna happen in the next year or two. Doesn't mean markets won't start anticipating it at some point. We are doing things that we havne't seen in the past. And policy makers do not know the outcome and I don't know the outcome. You do know it will have consequences and you can bet on inflation.
Munger: I remember the 2 cent first-class stamp and the 5 cent hamburger. In my life I think I've had the most privileged era to live. The trick is to avoid runaway inflation.
As I understand it, most economists (certainly, most economists whose opinions matter to central bankers) believe that a small rate of inflation, perhaps 1-2% annually, is a Good Thing, since it encourages savers to invest in productive companies rather than just stuffing greenbacks under their mattresses.
So "I guarantee you the dollar will buy less 10-20 years from now" is a pretty safe bet, regardless of the general political and economic situation.
actually it is sort of a myth that buffett ignores the macro.
he engages in a lot of macro trades if you look back.
here are some examples: berkshire's silver trade executed by Commodity trader Andrew Hall of Phibro, going long the brazilian Real, investing in Petro China, his past investments in more than one railroad... these are all investments that correlate with a kind of macro theme. they might not be the only factor, but definitely A factor in his investment.
Regarding the origin of the Qwest network: "Philip Anschutz, who owns more than 86 percent of Qwest - 55 percent of a combined Qwest-LCI - previously owned the Southern Pacific Railroad. When he sold the railroad to Union Pacific in 1996, he negotiated to buy the rights of way alongside the tracks of both railroads. Combined, they represent the cable route of a significant portion of the network. The rest of the cable is run along lines for which Qwest leases the right of way for up to 50 years, or along interstate highways, where it leases rights of way from transportation authorities for 20 or 25 years. Eighty-five percent of the Qwest network is strung along railroads."
The really interesting thing here is that Buffett is set to use Berkshire shares for the acquisition. I can’t remember the last time that he did this, I know he really regretted it with Dexter Shoe Co.:
In 1993, Berkshire paid $433 million for the Maine-based company. Rather than use cash, Buffett used Berkshire Class A stock to fund the purchase. That Berkshire stock is worth eight times more now, giving the Omaha, Nebraska-based insurance and investment company a $216 billion market value.
Dexter didn’t make it that long. It ended shoe production in the United States and Puerto Rico in 2001, and Berkshire folded what was left into its H.H. Brown Shoe Group unit.
“What I had assessed as durable competitive advantage vanished within a few years,” Buffett wrote on Friday. “By using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion. In essence, I gave away 1.6 percent of a wonderful business — one now valued at $220 billion — to buy a worthless business.”
“To date, Dexter is the worst deal that I’ve made,” Buffett went on. “But I’ll make more mistakes in the future – you can bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions: ‘I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.’”
I don't see why it matters whether or not he uses cash or stock. If he had bought dexter using cash, the investors could have turned around and used that cash to purchase berkshire stock - making the deal equivalent to buying with stock. The fact that the stock went up over time would have been true in either case. I think that the comment about it being a mistake to have used stock instead of cash, and that it was compounded, was simply to make for a better story.
In general, there isn't that much stock on the market (millions/billions of dollars worth) that an outside investor can get his hands on. So, if Buffet had bought dexter using cash, the investors couldn't have just turned around and used that cash to purchase Berkshire stock.
Exactly - if you look at the numbers, you'll see that BRK.A is a very low-volume stock (today's volume was 1,700, which is quite high for that stock). It's also got only 1.5M shares outstanding, in comparison to (for example) IBM's 1.3B.
Buffett himself keeps no firm schedule - he keeps his time available specifically so that he jump on deals. His organization is organized for jumping on opportunities once he decides they are a good deal.
But don't trains run on electricity in a lot of places? So doesn't that make a comparison to diesel truck efficiency bogus? It's like that 400 mpg plug in hybrid we heard about a while back.
It's not the engine that makes difference. Internal combustion engines don't vary by orders of magnitude in efficiency. It's less friction, higher scale and constant speed that make trains more efficient. Diesel or electrical, does not matter. They spend less energy per ton per mile.
// I'm not entirely sure that what I said is 100% truth, so take it with a grain of salt.
In the United States, where this railroad operates, there isn't electrified freight rail. Whether railroads in other countries are electric is irrelevant to this acquisition of a US railroad.
Not sure how diesel trains are "worse". When you have a 1000-mile line through the middle of nowhere, it's probably better to bring the power-plant with the train, instead of having 1000 miles of wire and electrical substations sitting idle most of the time. (Overhead wires also interfere with tall railcars, like double-stack container trains.)
For commuter trains, though, I am not sure why we use diesel. Lower upfront cost is my guess, which is kind of a shame. (The US has big problems with buying proper infrastructure. Much better to spend $100 million over 10 years and provide mediocre service than to spend $50 million in one year and provide excellent service for 10 years. Funding anything other than roads is politically unpopular; trains are "noisy" and we don't want more of them. Yeah... some day I will move to Europe or Japan...)
Depends on what you mean by 'worse.' Electricity isn't automatically good. An electric train could be vastly more inefficient than a diesel train, and the way that the electricity is generated is also called into play.
If using electricity, it is FREE to change fuel source. How much to convert all trains to nuclear/solar/electricity/... if all oil imports are blocked?
I wasn't saying that. I debunking the statement, "Our trains are on electricity, so we're 'greener' than you with your diesel trains." Neither fuel efficiency nor the ratio of pollution to energy produced have anything to do with the cost to convert to different energy methods.
On a side note, I doubt that the amount of money it takes to convert a fleet of locomotives to electricity is even in the same ballpark as the cost to build a nuclear power plant. This also doesn't take into account any loss of power due to transmission distance, heat generated in the lines due to resistance, etc.
Well, they do. Railways in almost every country relies on diesel engines. Even if most of their lines are electrified, there are diesel shunters and engines for branch lines and factory sidings. And these are vital for freight transport. (Even in Switzerland with almost 100% electrification of railways.)
Well, there are submarines running on nukes instead of diesel, but doing that on land might raise a few eyebrows ...
The real point is that cost of fuel is a lower percentage of total costs for railroads (a casual search hit on a 1997 guidebook said 7.1% vs. 13.5% for trucking).
I think his decision may be related to his favorite economic indicator: freight transportation. In an interview with ABC, Buffet said that the Freight Transportation Service Index was one of his top indicators of how the economy was doing: http://cosmos.bcst.yahoo.com/up/player/popup/?rn=3906861&...
Watching the flow of raw materials and manufactures around the country is probably a better indicator of economic health than looking at the speculators pump up the Dow.
1. The capital expenditures of railroad companies are changing. Most of them have pretty much laid track everywhere needed. If expansion isn't necessary, CapEx will go to maintenance for the most part, this means a ton in "owners earnings" to go up to BRK-Parent
2. Railroads > Trucking when oil shoots up. Could be his view that this is likely.
For bonus, I know there is a lot of talk about BNI having a competitive advantage at getting access to shipping Chinese goods because of their west-coast track network, apparently they are better developed than others for this.
The oddness in the UK is that train operating companies (TOCs) aren't allowed to own track. Instead there is a separate entity called the Strategic Rail Authority (SRA) that owns and maintains the infrastructure. Joe TOC can't really say "London to Edinburgh is our strategic route so we'll happily pay to upgrade it" because Jane Rival TOC running on the same SRA track has zero incentive to contribute. So it's a mess.
At the time, however, this was deemed to be better than allowing Joe TOC a monopoly on route A and Jane TOC a monopoly on route B.
In practice these are State companies still to all intents and purposes. The staff are all members of featherbedded unions and the government will be crucified by the voters if the TOCs screw up too badly, and everyone knows it.
IMHO though, rail passenger travel is going to see a resurgence in the USA in the coming years. Air travel is in shambles, costs are going through the roof and service level is dropping precipitously. For short to mid-range runs I think rail is going to take over again. This would involve un-screwing Amtrak somehow, but if the demand exists, someone will fulfill it.
I took the Amtrak train from Vancouver BC to Seattle WA last night - it was very nice. Price was reasonable (about 1/3 the cost of flying), seats huge, I got cell reception the whole way, power plug in the seats, and even a lounge car with snacks and drinks. There's really no better way to travel.
Could you explain the "Railroads > Trucking when oil shoots up" in more detail?
I would assume that the fuel costs of diesel locomotives are just as tied to oil prices than fuel costs of trucks. The operating costs of electric locomotives would get equally more expensive as well as electricity prices are not independent of oil prices (and electricity is always more expensive than oil).
Freight rail efficiency is measured in "labor-cost-per-revenue-ton-mile".
The cost of trucking is dominated by the fuel-cost-per-ton-mile.
Whereas the cost of moving 1 ton of goods over rail is dominated by the cost of labor, the cost of moving 1 ton of goods via truck is dominated by the cost of fuel.
In point of fact, rail freight gets ~436 ton miles per gallon.
The only mode of transport that gets more ton-miles-per-gallon is water transport (DSO, dry bulk shipping, oil and gas tankers, panamax, river barges, etc...)
The edge case is liquid and gaseous hydrocarbons, which can be transported via pipeline. It's no surprise that Buffet has been buying up oil and gas pipelines over the past several years.
The only catch here is that waterway transport inside the United States has sub-optimal efficiency due to the Jones Act.
Possibly, if price of the fuel is, say (it's just a random number, really), 1/3 of all expenses for the railroads, and 1/2 for trucks, then rising cost of oil will hurt trucks more (even if also those 2/3 of other expenses sees some increase).
(Electric engines are out of the question for BNSF. Insanely high cost to electrify the network.)
Assume trains are more fuel efficient, but less convenient because of fixed routes and the cost of loading and unloading the cargo onto trucks at the endpoints. As fuel savings increase, trains become more attractive.
> as electricity prices are not independent of oil prices (and electricity is always more expensive than oil).
Oil isn't used to generate electricity. At least not much. Look for coal, nuclear power, some natural gas.
In general electricity is much cheaper than oil based forms of energy. The reason why cars run on gasoline and Diesel is, that those have a much higher energy density than current batteries.
Electricity is a lot more expensive than oil based energy.
In 2009, the industrial price of electricity in California is around $0.10 / kWh. That's $0.028 / MJ. The current price of diesel oil is $2.801 / gallon, which is $0.616 / litre which is $0.016 /MJ (assuming 38.6 MJ/l as the heat of combustion of diesel oil).
So diesel oil is $0.016 / MJ while electricity is $0.028. As you can see, electricity is a _lot_ more expensive in ideal circumstances (all the energy is converted to useful work). Now obviously, not all of the heat in the combustion engine can be converted to mechanical energy so there's quite a loss there while electrical engines have very good energy efficieny ratios, but still, oil is a lot cheaper than electricity, and that is the main reason it is used as the primary energy source.
EDIT: I have made a huge (100x) mistake, thanks for eru for spotting it, it's corrected now. Still, my point stands.
Thanks for the numbers. I guess I will have to run some numbers on my own, to see if that turn out.
In principal electricity should be at least as cheap as Diesel in terms of usable energy --- because if it was more expensive you could use Diesel to generate electricity (arbitrage opportunity).
Also the efficency of moving Diesel engines is not that good. Less than 30% or so. And they can't get much better without raising their working temperature, because the theoretic maximum (Carnot Engine) isn't that much higher. Moving engines have to be quiet compact --- on trains less so than in cars. The big stationary engines in the power plants do not have to conform to this limitation. (But there is some loss in transmiting the electrity through the power lines, too.)
I'll come back with some numbers soon.
Edit: I don't know why someone downvoted you. If your numbers are wrong, they should they so. If not, there's no reason to downvote.
You should be multiplying the diesel price/joule numbers by roughly 5x to make them comparable to electrics.
When you buy metered electricity, you're paying for the end product. Internal combustion engines are roughly 20% efficient on average, going from chemical energy to kinetic. Electric motors are 90%+ from electricity to kinetic.
"Electric locomotives benefit from the high efficiency of electric motors, often above 90%. Additional efficiency can be gained from regenerative braking, which allows kinetic energy to be recovered during braking to put some power back on the line."
the costs b/w trucks and freights differ after a certain price point and it becomes cheaper to have goods travel by freight than by truck. So, if you go back and look at when oil was at its high, railroads were performing better than trucks
The split won't actually raise capital for the deal, but will help to payoff shareholders of the railroad. According to http://www.marketwatch.com/story/berkshire-approves-50-for-1... the split is to "accommodate holders of smaller amounts of BNSF shares who opt for a share exchange rather than a cash payment."
So, some shareholders of Burlington will opt for shares instead of cash, and since you can’t own a fraction of a share, they have to split the stock to accommodate them.
It is a big deal, but they aren't splitting their class A shares. Class B was introduced to make shares more affordable to people who wanted to invest, but wanted a lower entry point. I think splitting the B stock is keeping with that sentiment.
I believe Class B wasn't introduced for that reason, if I remember correctly it had something to do with people with Class A needing to divide stock to leave it in their will or as gifts.
The way cars have monopolised USA and lack of poor public transport infrastructure might provide a huge opportunity for rail road companies. I really hope to see cheap public transport system in USA. Also given lot of public awareness about global warming and reducing oil consumption may be added incentive.
Yeahhhhh, no. We've been talking about personal pod-based mass transit for decades and it has yet to materialize, even without the sci-fi billion-dollar mag-lev thing.
Rail will be the de facto standard for mass transit for years to come. Why? Because it goes really, really fast, we have had literally hundreds of years of experience running trains of all sorts, and experience, know-how, and resources are available cheaply.
Honestly, I don't even think mag-lev will take over as the primary form of rail transport. It's still too expensive, and the gains not sufficient to justify the additional cost. We have high speed trains running impossibly fast on existing rail infrastructure - unless you can double that speed and break the sound barrier or something, there's no incentive to spend ludicrous cash on that sort of system. Even Shanghai, a city that seemingly has unlimited funds for infrastructure, has shied away from mag-lev after building the airport line.
It seems to be a flight from cash, in the prospect of Obama's bailouts and Fed's endless dollar printing. A railroad business makes perfect sense when the incoming inflation will give the definite advantage to the low-cost transportation over any other alternatives.
BNSF is a freight railroad network, unsuitable for mass public rail transit. Buffet is getting into the freight service business, not passenger traffic.
BNSF rails are used for mass transit in Chicago. They're also used for Amtrak routes.
BNSF has historically been the freight railroad most friendly to passenger rail. Unlike Union Pacific and CSX, they aren't antagonistic to Amtrak, and make an effort to give the passenger trains proper right-of-way.
An interesting note about the Metra service in Chicago is that it is operated by the BNSF under contract with the State. So the Metra conductors on the BNSF line are actually BNSF employees. It is one of the busiest and most productive lines Metra operates. It's also one of the most professional.
Is there any surprising recent development concerning European HSRs? There are new lines opening in Spain, France, Germany, lots of ideas in many other countries (UK), but it isn't much faster or bigger than last few decades. There are still more new highways, and even though railroad passengers numbers (HSR) are rising, still only quite slowly.
New lines in the UK, too: High Speed 1 (the Channel Tunnel Rail Link) has been up and running for a bit, and the discussions about a high-speed replacement for the Midland Main Line are going.
Very interesting to note how a top value investor differs from VCs.
When Buffet goes all-in for future of American economy, he goes for a company/industry which has been around for a century or more with stable cash flows. In effect though, future of American economy wont matter much to him unless the economy goes into a severe long depression - which he is betting against.
When VCs go all-in for future of something - they go for companies/industries with no history of profits. That is why they have to use crutches of hype and ipos using the hype. I think the hype machinery is working right now to create value - out of thin air - in clean/green energy tech.
I am not questioning the utility of VC - just questioning its characterization as investment. I think it is just speculation. Calculated at best, done by the smartest people. But still speculation. Just like most of Wall Street.
Is there a measure of the private gain from public support for rail vs truck? BNSF maintains its rails with less taxpayer support than the truck companies get for highways, right?
Interesting investment, if the US economy is indeed undergoing a restructuring with the dollar declining and exports replacing imports, then this should create a lot of business for the rail-roads.
However, while the transformation away from import driven consumerism, to manufacturing led exports may sound like things are great, they are in fact getting slightly worse. Because it is driven by a reduction in American global purchasing power, this makes imports, oil among them, more expensive and domestic products more price competitive.
I really, really hate the fact that I upvoted you.
Seriously. I was going to make the same joke, but I was also going to follow it up with something more pertinent, like the fact that rails have the best cost-per-ton-mile or that railroads are both a monopoly and in limited supply (you can't just make more of them)
So -- love the joke. But everybody can't just shoot out one-liners like that, myself included. Next time add something of value to the reader besides a joke. We don't want this place turning into reddit.
I had an office two blocks away from the BNSF line in Chicago when they were laying the fiber from downtown to the central office in Hinsdale. I went out and talked to the guys boring underground (TX fiber-slingers wearing metal-tipped boots and hats -- I'm sure people here have met them).
[next time] Could you just combine the two please so that I can enjoy voting up both the great one-liner and the pithy insight. I love humor, and I have a soft spot for great one-liners. My point is that others are the same way, and sometimes the jokes get more karma than the meaty content. That's not good for the board over the long term.
Whenever I find myself wanting to throw out a one-liner, I make myself stop and find something useful for others (or usually I don't post at all)
I tried to make up for it by giving him a stern lecture.
Think it helped?
Looking at the topic currently, out of 10 root replies, 2 are jokes, 1 is a basically a one-liner, 1 is trash, 5 are on-topic, and 1 is a complaint that this isn't HN.
Looking at the topic currently, out of 10 root replies, 2 are jokes, 1 is a basically a one-liner, 1 is trash, 5 are on-topic, and 1 is a complaint that this isn't HN. (sigh)
Yep, it's kind of a bummer. Be interesting to see how it unfolds over the next hour or so (and we are polluting this unfolding with our meta-discussion) -- maybe it will even out. (Aha! http://news.ycombinator.com/item?id=919318)
I think you are being a bit pedantic here. While he may not have made the purchase with his own finances he is the one making the decision and coming up with the strategy... and THAT is what people are interested in. People will be interested in this because of this implies about Buffet's thoughts on the future economic situation in America. Whose money he uses is of little interest or importance.
Maybe so. I agree with what you're saying, but even Buffet doesn't work alone, from what I understand Charlie Munger is pretty influential in most of the decisions as well.
the 77.4 percent of Burlington Northern Santa Fe it did not already own for $34 billion in cash and stock, in the largest deal in Berkshire history.
But wait, they also assumed 10 billion in debt. So they just "spent" 34 billion buying sock + 10 billion debts to get the company.
PS: I don't know when BH got their initial stake, but they could have paid something like (34 / .774) = ~43.9 billion to get the company. Assuming the company was profitable and paying down the debt you can somewhat ignore it.
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The hidden gem in this deal is the investment BNSF made in laying 24cnt fiber next to their track in continuous 4" pvc. I've always felt the decision to do that was a reflection on just how well-run the BN was as a company.
Large-scale packets on the rails, small-scale packets in the pipe.
Berkshire Hathaway doesn't just invest in well-run companies. It invests heavily in the management of well-run companies.