Opinion: Riding the rails at a high price?
(The following column appeared on the New York Times website on November 4, 2009.)
NEW YORK — What does Warren E. Buffett see in railroads? Berkshire Hathaway, his investment company, is paying a big premium for Burlington Northern Santa Fe, Breakingviews says. Mr. Buffett says he thinks the business of transporting goods around the country is ready to rebound. But investors may want to delay hitching a ride on his caboose.
On its face, the transaction, at a 31 percent premium to Burlington’s market price on Monday, makes other railroad operators look relatively cheap, Breakingviews says. Stifel Nicolaus says it thinks there could be more than 30 percent upside in the CSX stock price, for instance, if investors were to peg sector valuations off the Berkshire-Burlington deal. And that is after the lift that rival stocks got after the transaction was announced.
But it is not that simple, Breakingviews says. Berkshire now has its train set. Antitrust issues would prevent it from buying another, even if Mr. Buffett wanted one. Competition concerns would also be a barrier to further consolidation within the sector.
Meanwhile, leveraged buyout investors are scarce, as are activists like the Children’s Investment Fund, which retreated earlier this year after taking on CSX management for 18 months and driving up its stock price. So there is no obvious reason to attach any merger premium to Burlington’s rivals.
There is a general economic play. Railroad volume and prices have been soft through the recent recession. But they might at least have bottomed. Burlington’s adjusted third-quarter revenue of $3.6 billion was down 27 percent from the previous year, but up 8 percent from the previous quarter, according to BMO Capital Markets.
It is tempting to raise other possibilities, too. Railroads are more environmentally friendly than trucks. There is a chance the Obama administration will encourage investment by the highly regulated railroad industry. On another view, any emphasis on energy self-sufficiency could spur new coal-fired power plants, which in turn could increase the volume of coal shipments.
Yet the trucking industry, suffering from overcapacity, is not going to give up without a fight, Breakingviews says. And a recovery will take time, especially for the transportation segments that relate to consumer products. At best, Mr. Buffett’s fully priced deal will bear fruit only over time. Short-term followers in the sector could be disappointed.
Wednesday, November 04, 2009
