Forbes' rail sector assessment on — and off — target

Berkshire Hathaway Inc.’s proposed buyout of Burlington Northern Santa Fe Corp. shares is making investors pay more attention to the transportation sector, which largely has been overlooked, according to an interesting article posted online by Alexandra Zendrian on Forbes.com.

“This sector will boom in the recovery, so get in while the getting's good. As the economy eases into more of a recovery, and people begin to buy more goods or want to travel more, transportation modes are going to literally be the vehicles to make this possible,” he said in the article, which is titled “Buffett Bought A Choo-Choo (And You Should Too).”

As companies gain revenue and can afford to hire more workers, and people are more securely employed and have more money saved, they'll begin to take vacations and travel more on trains and airplanes, said Zendrian.

For now, railroads are doing better than other modes, aside from barges, because they move freight at a lower cost, according to Clint Currie, an analyst at Concept Capital's Washington Research Group that Zendrian quotes.

However, the article veers from insightful to uninformed when Zendrian quotes Currie on potential “re-regulation” legislation that could impact railroads’ growth.

“The Railroad Antitrust Enforcement Act, for example, would target the railroad monopolies and open up competition, which could hurt the industry,” Currie said.

Railroads aren’t monopolies — captive shippers notwithstanding — and they already compete with other railroads and modes for traffic. The legislation certainly would impact railroads, but not by “opening up” rail competition. As railroads themselves would tell Zendrian, the effects would be an inability to set or increase rates based on market conditions and invest sufficient capital in infrastructure improvements.

  • The fact that Forbes apparently thinks we have a monopoly points out again that we need to do a better job of educating the public, press, etc.

  • FSAdams:  Amen.  The industry does a lousy job of telling its story.  It somehow seems to think that the only outsiders it needs to deal with are legislators in Washington.  Of course lobbyists tend to work through Law Dept. channels, which is a belt and suspenders approach.  Forbes and other national publications used to have staff people who covered "the rail beat" and actually learned quite a bit about the industry over time.  With a very few exceptions, they all have been retired or otherwise cut loose.

    Does anyone think Buffett was dumb enough to plunk down $26 billion of additional cash for the rest of BNSF without getting a good assessment of the likelihood of punitive legislation hurting the railroads?  If so, they don't know their Buffett - or their railroads.

  • I'm gonna reiterate my previous point here.  (Not that that will change anybody's mind, but maybe I can word it a liitle more carefully, so it doesn't sound like I'm slandering BH.)

    The rail industry is inevitably at risk of government over-intervention.  Stock in private and institutional hands moderates re-regulatory tendencies, since it's no longer a question of a whole bunch of annoyed "captive" shippers and consignees (who have a lot of concentrated gain from re-regulation) weakly counterbalanced by a the rest of us, whose costs and benefits aren't seen and felt as directly.

    Anschutz was able to pull it off with the SP since his use of right-of-way was separated pretty cleanly from the rail business, but I don't think that taking a big road private now makes (political) sense.  I've been wrong before, and Buffet has been right a couple of times;  just hope this isn't another Dexter Shoe.  (I still miss them.  Washable leather shoes.  Who'da thunk it.)

  • Sorry, anmccaff, but I've got to disagree with you on this one.  First, rail stock is in public hands now and that hasn't kept the hypocrites of the utility, chemical and other bulk industries from seeking a rather thorough re-regulation of the railroads, despite all the evidence that deregulation has led to a financially healthy industry.  Besides, public ownership is miniscule; most "public" stock is in the hands of mutual and pension funds and other institutional investors.

    Second, there is a lot of myth about Anschutz and what he did or didn't do.  I was at SP during the Anschutz ownership, and I wasn't quite the way you postulate.  He sold off a lot of real estate that was not needed or used by the railroad for transportation purposes.  The revenue paid for 277 AC locomotives from GE, the largest single order to that time.  On real estate that was under the railroad, SP routinely took back freight easements and the maintenance, which transferred ownership and its cost to the public agencies that wanted to build the Alameda Corridor and operate Caltrain passenger service in numerous locations.  That benefited SP by getting the assets off our books while ensuring continued freight service.  It benefited the public by providing a right-of-way for it.  Sorry, but Anschutz may have been guilty of any number of business practices of which you or I might not approve, but this isn't one of them.

  • LK>"Sorry, anmccaff, but I've got to disagree with you on this one.  First, rail stock is in public hands now and that hasn't kept the hypocrites of the utility, chemical and other bulk industries from seeking a rather thorough re-regulation of the railroads, despite all the evidence that deregulation has led to a financially healthy industry.

    Big difference between "seeking" and "succeeding".

    LK> "Besides, public ownership is minuscule; most "public" stock is in the hands of mutual and pension funds and other institutional investors."

    Exactly my point.  Right now messing with the railroads means messing with a great many investment institutions, some of which are, WB willing to look beyond the next quarter, although some notoriously ain't.

    LK>"Second, there is a lot of myth about Anschutz and what he did or didn't do.  I was at SP during the Anschutz ownership, and I wasn't quite the way you postulate.  He sold off a lot of real estate that was not needed or used by the railroad for transportation purposes.  The revenue paid for 277 AC locomotives from GE, the largest single order to that time.  On real estate that was under the railroad, SP routinely took back freight easements and the maintenance, which transferred ownership and its cost to the public agencies that wanted to build the Alameda Corridor and operate Caltrain passenger service in numerous locations.  That benefited SP by getting the assets off our books while ensuring continued freight service.  It benefited the public by providing a right-of-way for it.  Sorry, but Anschutz may have been guilty of any number of business practices of which you or I might not approve, but this isn't one of them.

    I wasn't talking about any of that, and I wasn't disapproving.  Aligning property ownership with benefit as directly as possible is usually a good thing.  I was talking about the co-use of rail right-of-way for other utilities -pipeline, wire, fiber-optic, which he largely kept separate from the SP, and a damned good thing he did.  

  • Left a word out,  Corrected version:

    Exactly my point.  Right now messing with the railroads means messing with a great many investment institutions, some of which are, like WB, willing to look beyond the next quarter, although some notoriously ain't.

  • You're right, anmccaff.  You haven't changed my view one bit.  With regard to the BNSF transaction, the non-Berkshire Hathaway stockholders will have to approve of the transaction by a two-thirds vote sometime in the first quarter.  Institutions do not have emotions.  They can be expected to assess what is in their economic interest and act accordingly.  I may think $100/sh ir cheap, but the lack of any other buyer coming forth so far suggests that $100/sh is about what the market (Buffett) will bear.  I just don't see any of this having any effect on Washington.  BNSF still will be the largest or second largest railroad in the U.S., depending on how you count, and the utilities, chemical companies and other bulk shippers who don't want to pay their higher share of system fixed costs still will not want to.  It is even increasingly appearing that Sen. Rockefeller may have "scared himself" that he might do real damage to the railroads if he brought forth a more aggressive bill.  Now he seems to be trying to figure out how much less he can put in the bill without incurring wrath of certain shippers instead of wrath of railroads.  Stay tuned for the never-ending soap operat.

    As for Anschutz, it was all about the money.  Phil is a deals guy, not an operator, and not an entrepreneur.  He use SP for his purposes, which mostly was his right as an owner.  Phil's business model is nothing like Buffett's, and I think the comparisons fail.  Phil generated cash from multi-use of rail property - an early practitioners of public-private partnerships - and the cash went into the railroad, which had a desperate need for it.  The payoff was he got UP to pay $25/sh for a railroad with intrinsic value of not more than $15/sh and probably less.