Published: November 05, 2009 05:29 pm      

Buying railroad — 11/06/09

Warren Buffett exhibits his confidence in an old industry

By making his biggest investment to date in a traditional American industry, Warren Buffett unequivocally expressed his faith in the future of the U.S. economy.

Instead of following the lead of others and investing billions in a new Internet company that has yet to earn a profit or in some newfangled technology, Buffet’s company — Berkshire Hathaway — is spending a whopping $34 billion for the Burlington Northern Santa Fe Corp., a railroad with a history dating back 150 years. In addition, he is pickup up $10 billion of the railroad’s debt, bringing his total investment to $44 billion.

Buffett said he is betting on BNSF and its management, and on the railroad industry. “Most important of all, however, it’s an all-in wager on the economic future of the United States,” Buffett said. “I love these bets.”

While railroads may seem like so 19th century in today’s high tech world, they remain an economical way to move goods. The company claims that each train can move one ton of freight 423 miles on a gallon of diesel fuel, and that if 10 percent of the freight that moves by truck were put on trains, America would save a billion gallons of fuel per year.

Today’s BNSF is the product of 390 different railroad lines that have merged or were acquired since the days of the Civil War. Operating west of the Mississippi River, the company counts 220,000 freight cars traveling along 32,000 route miles, carrying consumer products, coal, industrial products like farm equipment, and corn, wheat and soybeans.

Berkshire Hathaway previously had invested mostly in insurance businesses and utilities, and Buffett admittedly has had a bit of a rough time during this recession. But who hasn’t? By purchasing BNSF, the Omaha-based billionaire was announcing that he’s back. .

Buffett said BNSF is an old industry doing things better and cleaner, with good leadership. Buffett’s usual strategy is to support management he likes, and he is a fan of Matthew K. Rose, the BNSF chief executive officer.

Buffett believes in the future of his newest acquisition, and in so doing, he is indirectly expressing confidence in CSX, a railroad that continues to play an important role in the economy of this community, and in Progress Rail, the company that makes rail cars in Raceland.