Buffett's Rail Buy Seen As Bet On Coal, Economy

SCOTT SIMON, host:

Railroad companies have been among the best performing stocks on Wall Street this month, not just conservative investments any longer but trendy since Warren Buffett announced he is buying the nations second-largest railroad, Burlington Northern Santa Fe. Now, if the $44 billion deal is approved by regulators and stockholders, it would be the largest acquisition ever for Mr. Buffetts Berkshire Hathaway holding company (unintelligible) a lot of other investors to take another look at railroads.

NPRs Adam Hochberg reports.

ADAM HOCHBERG: In some ways, Buffetts acquisition of Burlington Northern Santa Fe conjures up an image of a long-gone era - one of the countrys wealthiest men running one of the countrys largest railroads. In reality, Buffetts business holdings are far more diversified than those of the Vanderbilts or other railroad barons during the gilded age. Still, economists say his decision to take full control of a railroad suggests Buffett sees new potential in an old form of technology.

Mr. MATTHEW KAHN (Economist, UCLA): We knew that hes a very shrewd investor, and so I do think that theres an element of back to the future.

HOCHBERG: UCLA economist Matthew Kahn says Buffetts action is one of a number of signs that freight railroads are in a resurgence. While they may have been thought of as pass� in the 1960s and 1970s, theyre now playing a vital role in the transportation system, especially the retail supply chain. The most common things that trains carry these days are those large stackable steel containers often filled with imported goods that come to the U.S. by ship, then ride the rails most of the way to your local big-box chain store. Buffett by no means is the first investor to recognize the role of containerized consumer goods in sparking a rail renaissance, but Kahn says Buffett is the most prominent.

Mr. KAHN: To me a sign of genius is when after the fact you say to yourself, like Homer Simpson: Doh. In this case, ex-post it makes perfect sense, but to his credit, hes seized the day.

HOCHBERG: Industry analysts say the deal also might signal Buffetts take on the nations energy future. Another thing railroads carry besides consumer goods is coal the topic of much deliberation in Washington as Congress considers measures designed to reduce carbon emissions. Critics of the legislation predict it could kill the coal industry. But Anthony Hatch, an independent railroad analyst, says Buffetts investment may signal that the multi-billionaire is more optimistic about coals future.

Mr. ANTHONY HATCH (Railroad Analyst): Warren Buffett does his due diligence, and he has come it would appear to the conclusion that efforts to curtail the coal transportation are not as dire as we had all been thinking. (Unintelligible) also believes he can help influence the debate.

HOCHBERG: On the other hand, even if the coal business suffers, Buffett could be betting that the railroad industry is well positioned to thrive. The industry boasts that a train can move a ton of freight more than 400 miles on a gallon of fuel. And Morningstar stock analyst Keith Schoonmaker says that could be come important in a green economy.

Mr. KEITH SCHOONMAKER (Stock Analyst, Morningstar): Any sort of regulation thats penalizing emissions is probably going to favor rail over any other mode of transportation, so that may actually tilt the balance favoring rail over trucking, for example. We think therell come a day when we sort of chuckle that we used to ship goods across the country by truck, that thats so nonsensical in a day of efficient railroading.

HOCHBERG: In the week since the deal was announced, Burlington Northern Santa Fes stock is up almost 30 percent, while its major competitors Union Pacific, CSX, and Norfolk Southern each rose more than 10 percent. University of Dayton business Professor Mike Gorman writes some of that off as a halo affect from Buffetts purchase. But he says railroads remain a good long-term investment.

Professor MIKE GORMAN (University of Dayton): The growth prospects are good, return on investment is improving, and as railroads continue to become more competitive with truck and get higher rates from shippers, they can afford to expand.

HOCHBERG: Buffett already owns about a quarter of Burlington Northern Santa Fe, but his acquisition of the rest of the company is a somewhat unusual one for the 79-year-old investor. He paid a high price - some analysts say he vastly overpaid. And hes uncharacteristically taking on debt to do it, underscoring Buffetts enthusiasm for a deal that he himself has referred to as an all-in wager on the American economy.

Adam Hochberg, NPR News.

SIMON: And you can see exactly how far the Burlington rail network stretches across the U.S. on our Web site, npr.org. Transcript provided by NPR, Copyright National Public Radio.