One of my favorite sites to visit is Morningstar.com. Morningstar is known for its coverage in the mutual fund industry and has moved into the stock arena. And it appears they will start moving into the hedge fund arena. I enjoy browsing through Morningstar as I consider it a well rounded site with a value twist added to it. Whether their analyses on stocks are right or wrong, that usually depends on the outcome. For example, they were early in calling a housing bottom and I remember very clearly how they were reccommending certain housing stocks. Anyway, despite some of their errors ,which is expected in this industry, I still believe they are the closest thing we have to a “value based” website that offers a bit of everything. Anyway, I found their recent article on Burlington Northern to be very interesting.
First, they gave me some insight as to why Buffett and Munger are so hun-ho on rails.
“Railroads–now that’s an example of changing our minds. Warren and I have hated railroads our entire life. They’re capital-intensive, heavily unionized…, heavily regulated, and long competed with a comparative disadvantage versus the trucking industry, which has a very efficient method of propulsion and uses free public roads. Railroads have long been a terrible business and have been lousy for investors. We did finally change our minds and invested. We threw out our paradigms, but did it too late. We should have done it two years ago, but we were too stupid to do it at the most ideal time. There’s a German saying: Man is too soon old and too late smart. We were too late smart. We finally realized that railroads now have a huge competitive advantage, with double stacked railcars, guided by computers, moving more and more production from China, etcetera. They have a big advantage over truckers in huge classes of business. Bill Gates figured this out years before us–he invested in a Canadian railroad and made eight hundred percent. Maybe Gates should manage Berkshire’s money. [Laughter] This is a good example of how hard it is to change one’s mind and change entrenched thinking, but at last we did change. The world changed and, way too slowly, we recognized this.”
I actually live pretty close to the Union-Pacific and Burlington Northern yards and can confirm some of what they mention. I have been looking like crazy for a newspaper article I read that there is talks about using the rail system to transfer all imported cargo eastward to the Inland Empire ( i.e. Fontana) to help aliviate some of the traffic and congestion semi-trucks bring to L.A. area freeways. This would be HUGE for both UNP and BNI as it would create a toll from the ports to the unloading yards.
Anyway, I thought Morningstar gave a good analysis of the rail industry and some of the catalysts behind it. I am not totally convinced to put more money in rails ( I own one rail which I have mentioned on the blog before) as I believe there are some companies selling at attractive valuations that earn a higher return on capital. But nevertheless, it is worth noting that rails do have a large moat and unless we seriously start pumping out fuel efficient semis, once oil goes over $100, we won’t have too many options in terms of shipping items in long distances.
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