(The following story by Don Macdonald of CanWest News Service appeared on the Montreal Gazette website on April 10. With files from Bloomberg News.)
MONTREAL — Stock in Canadian National Railway Co. surged by more than five percent Monday along with other North American railways on news super investor Warren Buffett has made a big bet on the sector.
Buffett’s investment vehicle, Berkshire Hathaway Inc., has become the largest shareholder in U.S. railroad Burlington Northern Santa Fe Corp., according to a filing with the U.S. Securities and Exchange Commission.
Berkshire bought 1.6 million shares of Burlington Northern, the second-largest U.S. railway, for more than $81 a share, according to the filing.
The purchase brought Berkshire’s stake as of April 5 to 39 million shares valued at more than $3.2 billion US, giving it a 10.9 percent interest in the railway.
Buffett told an interviewer over the weekend he has invested in two other North American railways, putting $700 million in one and slightly less in the other. He did not name the companies.
Analysts speculated Monday that Montreal’s CN, the most efficient operator in the industry, is one of the other investments because the company is a good match for Buffett’s investing style.
Another clue that points to CN is that Microsoft founder Bill Gates, a close friend of Buffett, is the largest shareholder in the railway through his investment company. Gates and Buffett, who is widely considered the world’s greatest investor, are No. 1 and No. 2 on the Forbes magazine’s list of the world’s richest people.
“If someone was to tell me: ‘Warren Buffett bought three railroads, which three would you guess?’ Clearly CNR and (Burlington Northern) and then I’d have to think who that third one is,” said Daniel Ortwerth, transportation analyst at St. Louis brokerage firm Edward Jones. “In my opinion, they stand out.”
CN shares rose $2.68, or 5.3 percent, to close at $53.58 in Toronto. Burlington Northern stock jumped 6.5 percent in New York to lead healthy gains across the sector. Investors invariably bid up stocks when news breaks that Buffett has bought in, hoping to piggyback on his investing magic.
Ortwerth said railway companies have qualities Buffett likes in a stock, including a business he can understand and a long-term competitive advantage, especially with the rise of international trade and containerized shipping.
The analyst added CN has been “the clear front-runner” in customer service and reliability.
“I put those pieces together and say: ‘No wonder Buffett is interested in the rails,’ ” he said. “Everyone knows he’s buying Burlington Northern. OK, that’s a good one. But there’s better – (CN).”
He said CN stock performance had been lacklustre over the last year because it’s been lumped in with other transportation stocks suffering from investor concerns about a slowdown in the U.S. economy. That may have made the stock attractive to Buffett who has an eye for value.
“Grouping (CN) in with the rest of the transportation stocks is unwarranted. I think they’re a premium company that deserves a premium value.”
Canadian Pacific Railway Ltd. stock was also on the rise Monday, up 2.01, or 3.1 percent, to $66.10 in Toronto. But Ortwerth said he’s doubtful CP is the other stock Buffett has purchased because its business is more concentrated in bulk shipping of commodities, and it “will be a more cyclical company with a lower long-term growth rate.”
CN has a long track record of delivering consistently increasing earnings and dividends. But late last month, the company said its first-quarter earnings will be five- to 10-per-cent lower than a year earlier because of a 15-day strike in February and harsh winter weather that disrupted operations. It was only the second profit warning CN had issued in 12 years.
CN could be soon strikebound for a second time this year. The railway’s 2,800 conductors and yard workers are voting on whether to ratify a tentative contract that ended the February strike. Results will be announced today, the union said. A company spokesman said CN will use management personnel to keep trains moving in the event of a walkout.
Research Capital analyst John Chu said the earnings warning and prospect of a renewed strike have weighed on CN’s stock price, possibly creating a buying opportunity for Buffett.
“My personal guess is that he was probably buying CN because of the consistency,” Chu said. “CN and CP are equally good companies. But CN is the best operator out there based on its operating ratio and I suspect that is something Buffett would value.”