(The following column by Mitchell Schnurman appeared on the Fort Worth Star-Telegram website on September 9.)
FORT WORTH, Texas — Burlington Northern Santa Fe moves more boxcars and containers than any railroad in the country, so it can reel off some big numbers. It hauls:
More than a billion canned goods a year.
Enough coal to power 10 percent of the nation’s homes.
The equivalent of 220 trucks of cargo in a single intermodal train.
But the figure that’s most surprising may be BNSF’s stock price, boosted briefly by a major investment from billionaire Warren Buffett. At almost $81 a share Friday, the stock has generated a total return of 200 percent in the past four years and 24 percent in the past 12 months, including dividends.
Not bad for a truly “mature” company, whose roots and technology go back 150 years — and whose industry was long expected to be a slow grower.
Instead, revenue at the Fort Worth-based company grew 15 percent last year to nearly $15 billion. That followed increases of 18 percent in 2005 and 16 percent in ’04.
The profit picture looks similar: Net income rose 23 percent last year to nearly $1.9 billion. That was more than double the amount in 2004 and makes BNSF one of the top profit-makers in North Texas.
Give globalization much of the credit for the growth spurt. Shipments in BNSF’s consumer products segment, which includes intermodal containers from China, have doubled in the past decade. Tons of toys, electronics, clothes and cars are moved via BNSF from the West Coast to the rest of the country.
And the international traffic doesn’t flow in only one direction. BNSF ships large volumes of grain from the upper Midwest to ports headed for China and other developing countries, where new appetites and wealth are driving business.
Then there’s the newest commodity, ethanol. Its rising popularity was behind a 23 percent increase in BNSF corn shipments last year.
Such long-term prospects, along with some recent trends in the United States, have made BNSF a hot investment– and it got hotter this spring. That’s when Buffett disclosed a large stake in BNSF and two other railroads.
Buffett’s company, Berkshire Hathaway, has accumulated 52 million shares of BNSF so far, which is 15 percent of the outstanding stock. It said recently that it might acquire up to a quarter of the shares. The last major buy was in late August, when Berkshire paid about $80 a share, just under the current level.
Buffett’s entry surprised some analysts, because the railroad industry had hit a peak in profits and stock market valuations, which means that he wasn’t buying on the cheap. Buffett conceded as much when he discussed the investment after Berkshire’s annual meeting in May.
“There are lots of things that I miss,” Buffett said, according to The Wall Street Journal. “I could have figured it out earlier.”
That he may double down on the bet now is further evidence that BNSF is sitting in a sweet spot. The company hasn’t commented on Buffett’s investment, but it has been bullish about its long-term prospects.
While BNSF is an industrial leader, it operates largely out of the public eye. With 41,000 workers nationwide and 3,3000 in Fort Worth, it hauls goods that are used by Americans every day, yet it doesn’t sell directly to consumers. And its snafus are the kind that the public generally doesn’t notice.
This summer, wet weather and flooding hampered coal production in Wyoming, for instance, and that was a point of discussion when BNSF released financial results. But there was no interruption in coal supply for power plants or other effects on the public.
One key to the railroad’s success has been pricing power. In a consolidated industry with strong growth, it has been able to pass along fuel surcharges and higher rates. Those two factors accounted for a 9 percent increase in the average revenue per car last year, which followed a 12 percent increase the year before.
In the second quarter, when shipping units declined 4 percent, the company was still able to boost revenue to another record, thanks to better prices and a better mix.
But the results prompted one analyst to ask whether BNSF was giving up too much with its focus on profits. Would it be better to lower prices and grow shipping volume?
“I think we have to keep it in context,” Matt Rose, chairman and chief executive officer, said about the results. “This is still a very, very busy railroad.”
Coal shipments were flat, primarily because of cooler, wetter weather this summer and the coal mine flooding, he said. And he doesn’t believe that the slowing of the retail sector will last.
“This is just a temporary patch we’re in,” Rose said, adding that BNSF is keeping expenses down and cutting some capital investment.
Last month, railroad stocks fell after a research report by Citi Investment said that a slowing economy would keep revenue from reaching Wall Street’s growth projections.
Rising fuel costs might dampen results, too. In the second quarter, higher fuel dinged the company for about $85 million, BNSF said.
But even that can be turned to the company’s advantage. One reason that Buffett likes railroads is that rising gasoline prices make them more attractive than trucking.