The Railroad Industry: Buffett’s Next Big Bet

…What is also interesting is that Buffett didn’t make a bet on a single railroad company, but on three. So it may not be that he saw value in BNI per se, but in the railroad industry as a whole. Railroads have always had near-monopoly status where they have operated because of the sheer amount of infrastructure required, and trade (and goods shipped) has increased due to NAFTA, but these and other traditional characteristics should have already been priced into the stock.

So where could the value that Buffett so clearly sees be coming from? Two things spring immediately to mind:

1. The coverage maps of the three railroads are somewhat complimentary – BNI and UNP operating in different portions of the west, NSC operating in the east. A merger could create efficiencies that increase the value of the combined companies that do not currently exist.

2. With the passing of “Peak Oil” and higher gas prices, railroads will increase in value as they are the most efficient method to move cargo across the country.

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