Warren Buffett "betting on the country, basically."

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Warren Buffett zoekt al 5/6 jaar naar een goede belegging voor het
kasoverschot dat zijn 'beleggingsfonds' heeft.
Tevergeefs, tot nu.

Nu is hij kennelijk overtuigd dat de spoorwegen in de USA weer 'in de
mode zijn.'

Groet / Cees

PS. Zijn vorige grote investering was op advies van de beheerder van
zijn energiemaatschappij 'MidAmerican Energy Holdings' in een
batterijfabriek in China. China gaat overigens MEGA-investeren in
zonne-energie op basis van produktie zonnepanelen in China.

Instant analysis: Why Buffett spent $34 billion to buy a railroad
UPDATED at 1:05 p.m.:

As I've written before, super-investor and world's second-richest man
Warren Buffett invests like an 8-year-old boy in the 1950s: He either
owns outright or has big stakes in Coca-Cola, Dairy Queen and candy and
chewing gum giant Wrigley, which bought M&M-maker Mars last year.

Today, Buffett completed his train set, offering a big premium of $100
per share to buy the remaining 78 percent of Burlington Northern Santa
Fe railway that he didn't already own. It's a $34 billion deal --
Buffett's biggest ever.

It was Buffett's big investment in Burlington Northern early last year
that alerted me to the pre-recession boom in the U.S. freight railway
industry. This is an industry that had grown so moribund in the 1970s
and '80s that it was actually tearing up tracks, as companies switched
their shipping away from railroads and onto 18-wheelers.

But as fuel prices soared and demand for U.S. goods and raw materials
surged in China, the railroads experienced a rebirth here. Companies
were scrambling to add new tracks and even increase the height of
tunnels to allow for double-stacked railroad cars to pass. You can read
about that in a piece I wrote in April 2008 by clicking here.

Since then, however, U.S. railroads have struggled, as the Great
Recession has reduced the amount of goods being shipped and oil is
trading at half its peak of summer 2008. When oil prices drop,
manufacturers switch their shipping from trains to trucks, which can
take their goods directly from Point A to Point B without the transfers
required in rail travel. UPDATE: The federal government set aside $48
billion of the $787 billion stimulus for infrastructure improvement,
some of which goes to railroads. I'm checking to see exactly what cut of
the stimulus Burlington Northern gets.

But when oil prices go up, rail is king. The railroad industry also has
spent a lot of time and money touting its greeness, compared to trucks,
and likes to say that one rail car can carry as much freight as four
18-wheelers.

So why did Buffett go all-in with his railroad?

This morning on CNBC, Buffett said his purchase is a "bet on the
country, basically."

"I basically believe this country will prosper and more people will be
moving more goods 10, 20, 30 years from now and the rails will benefit,"
Buffett told CNBC.

It's also a bet on the future of another country -- China.

China craves the coal and other raw materials that the U.S. produces.
Those commodities fuel the great economic engine that is China, which is
the factory to the world. U.S. coal and goods are shipped via rail to
Pacific ports and then shipped to China. With his round-out purchase of
Burlington Northern, Buffett thinks China will continue to be strong.

I shot an e-mail to Art Hogan, managing director at Jefferies, to get
his take. Here's what he wrote back:

"Buffett is making an elephant-sized bet on three things here and all
are related. He thinks the economy in the U.S. is getting better and
will continue. He believes that energy prices will continue rise and
that trains will be more productive then trucks in that environment and
third and most important he sees Burlington Northern as cheap with a
longer-term investment time horizon (three years vs. three months),"
Hogan wrote.

The final point is a good one: Shares of Burlington Northern are trading
well up off their March bottom -- they've popped up to nearly $100 per
share today on the Buffett news (up 28 percent) after bottoming at
nearly half that in March.

However, compared to their all-time high of more than $110 per share
last summer, Buffett gets the remainder of his railroad at a relative
bargain. And if the stock continues to grow, he'll be in the tall green
in a decade.

The purchase is also a strategic one for Buffett who, I need to say in
full disclosure, is a director of The Washington Post Co.

Burlington Northern has tracks in the western U.S. that run through
states where Buffett controls power companies through his MidAmerican
Energy Holdings. The Burlington Northern lines are major supply lines
for coal traffic.

UPDATE: That's another element of this purchase: In a very direct way,
Buffett is almost betting on energy stocks and coal. Railroads make a
great profit from hauling coal and Buffett clearly believes that coal
has a long future in producing energy, despite the pushback from some
environmentalists. And it's worth noting that eco-pressure is higher in
the U.S. than in most other countries, such as China, which can pretty
much burn as much coal as it wants.

I e-mailed Peter Boockvar, equity strategist at Miller Tabak, to get his
quick take on Buffett's purchase. Here's what he e-mailed back:

"He's betting on global population growth and global wealth increasing
thus raising the world's purchasing power to buy stuff that the U.S.
makes and also a bet that we will still import stuff that the rest of
the world makes. It's also a bet on this particular mode of
transportation that has proven to be most efficient and thus creates a
defensible business model that Buffett so covets," Boockvar wrote.

As a bookkeeping note, I write here that Buffett purchased Burlington
Northern, when in fact his company, Berkshire Hathaway is the actual
investor. The two are inseparable -- Buffett is Berkshire -- so it's
just a short-hand way of describing the deal.

However, in this case, Buffett did something that Berkshire usually does
not: execute a cash-and-stock deal and split his stock. Because this is
Berkshire's biggest purchase ever, it was too big for just a cash deal,
so he had to add stock.

On the stock-split side, Buffett has famously opposed the practice. But
in this case, he did it, he told CNBC, to give small Burlington Northern
investors the same tax break that large holders would get.

This is an interesting deal for us whale-watchers -- those of us who
like to follow what big investors do. Buffett likes to own simple
companies that he understands. Today, he completed his train set.

-- Frank Ahrens

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