Buffett's Burlington Buy Is Really a Bet on China

Just when it looked like the prophecies of Nostradamus may be coming true, a white knight, in the form of Warren Buffett, strode in and saved the day. Buffett’s buy of Burlington Northern (BNI) turned the US equities markets from ugly duckling to suave Prince.

The purchase was hailed by the Oracle himself as a “bet on America”. We see it a little bit differently…it is a bet on Asia/China.

Burlington Northern System Map

The map above (click to enlarge) illustrates the BNSF network. The BNSF system travels through the agricultural heartland, the manufacturing mid-west and the coal rich Powder River basin. Conveniently, the rail tracks extend all the way to the Port of Long Beach. Not only can BNSF transport goods to port for export to China, but on the return trip it can drop off inventory from China at every Wal-Mart (WMT) from L.A. to Chicago.

So while, yes, BNSF is a US company and you cannot drive a train to Asia, it is still a bet on Asian growth.

This is exactly the growth that we have been betting on with our position in Norfolk Southern (NSC) and US Steel (X). Both companies are seeing significant demand as a result of a Chinese hunger for steel. Of course we were quite pleased to have the backing of Warren Buffett to boost our positions.

Disclosures: Author is long NSC, X

Comments

[Roger Knights:]

"The future is in containerized freight (both import/export) and domestic...rails do the long haul, motor carriers the pick up and delivery"

Especially if there are penalties on CO2 emissions, which would benefit RRs at the expense of truckers.

Nov 06 10:44 AM

[Tony Petroski:]

From the article:

"Not only can BNSF transport goods to port for export to China, but on the return trip it can drop off inventory from China at every Wal-Mart (WMT) from L.A. to Chicago."

Huh?

Nov 06 10:47 AM

[tripleblack:]

On point: I agree with the author, Buffit is betting on China, not the U.S., though this is just a personal opinion. It was the first thing that popped into my mind when I watched his "Betting on the USA" announcement.

Of course I am widely known to be a cynic.

Nov 06 06:13 PM

[Mark Anthony:]

Yes! I think more and more people are starting to get it:

Railway transportation
= Shipment of Coal Export to China
= Needs to buy US coal producers (PCX, JRCC, ANX, ACI...)
= Needs to buy dry bulk shippers (EXM, EGLE, TBSI, DRYS, etc.)

Dry bulk shippers is one of the things I am most bullish on. Another is one critical precious metal that China has ZERO product, which China desperately needs to hoard, and which America has one of the world's most unique producer:

The palladium metal, and Montana based SWC, Stillwater Mining.
seekingalpha.com/autho...

One thing I do not understand is Buffett's timing and pricing of his BNI acquisition. Maybe there is an urgency for him to get out of the US dollar cash positions ASAP, otherwise there is no good explanation of his bad timing and pricing.

Nov 06 07:22 PM

[ACEMAN:]

Y'all got to understand that it makes no sense to go buy yourself a national railroad with aging rails and expensive to run railroad cars to deliver various types of coal be it thermal or slurry, hard or soft, utilities or steelmakers. where is the advantage to that theory, unless he intends to write down the whole shebang for one major balance sheet correction. No one in their right mind would do that, even if y'all wanted to save America by building confidence in an aging and aged infrastructure, it makes no sense. Until the Secy of the Interior gets religion on coal and oil shale, this admin is in cohoots with the environuts who wish to stifle any additional commercial mining, drilling where there is loads of coal, oil and precious metals.Go read the latest roadblocks induced by the paranoid and crazy new EIR's promulgated by Secy Salazar. Y'all don't know a thing about hard commodities if you think Robber Baron Buffett's deal is about coal. Coal has a purpose in its comercial use and that it lights up your homes as electricity. Buffett could have bought all the major producers in the US for the money he paid for BNI. The deal could be some sort of derivative play on the value of the land and the right of way of the rails and this can easily be leveraged, sliced and diced, and sold to Wall Street and then bankable as a credit pool and sold for its righjts as a long term bond. all sounds familiar, don't it? Now, I really need my beignet and coffee at the Cafe du Monde, NOLA.

Nov 07 12:22 AM

[The Real Deal:]

Of course he is betting on China. But it has nothing to do with China's commodity exports.

1) First he stocks a large chunk of his money in hard assets like BNSF to protect it from dollar devaluation. Commodities are already locked up by other 'investors', and volatility a bit high for the Oracle taste. This is the preservation move.
2) Next comes the actual China play. That play is based on China's historically massive investment in that country railroad infrastructure. We are talking 21th century technology rail here - not what we see today. To compete against that, and to reduce ever rising cost of oil, USA has to revamp its rail structure. This must be done of US is finished. This is where Buffet BNSF holding will accept massive investments from US private & public sectors, plus China capital and technological investments in exchange for ownership.
3) Leverage green technology. The railroad lands and rights of way will be critical to any build out of green power grid infrastructure. It becomes the new interconnect, able to bypass existing power grid interconnect. Already China is selling hundreds of wind turbines to a Texas wind farm. They would love to sell thousands more to Buffet new 'railroad' wind farm and interconnects.

All the Oracle has to do is to sit on his assets on the ground, protected from inflation, and wait for the 2) and 3) investment money coming his way. And looking pretty.

Nov 07 01:05 AM

[E Nuff Sed:]

Brian, you see a chinese under every bed. The simplest explanation is " a bet of the recovering economy" with a wide moat company which can absorb and utilize the massive amount of cash being thrown off by BRK.
BNI's ROE for the last 5 years has been between 15 to 20% while BRK's ROE has been languishing at around 5 to 10%.

Where else can you get this kind of return but in your very own RR?

Nov 07 03:05 PM

[Marty From ...:]

Consumers in America will continue to need the staples that Walgreen's, Target and WalMart sell everyday. These staples are now made in Asia and will continue to be made there because the yuan rides down with U.S. green toilet paper, so there'll no longer be a currency advantage with declining dollars. Buffet's biggest challenge in the deal: changing the union culture deeply ingrained in the rail system. That culture is steeped in gaming a system built to protect rather than serve.

Nov 07 03:50 PM

[ManAboutDallas:]

No, what you really need to do is ( take your choice )

get back on the Thorazine drip; or
take the "empty room, loaded revolver" option, you're too stupid to be running around loose on Planet Earth.


On Nov 07 12:22 AM ACEMAN wrote:

> Y'all got to understand that it makes no sense to go buy yourself
> a national railroad with aging rails and expensive to run railroad
> cars to deliver various types of coal be it thermal or slurry, hard
> or soft, utilities or steelmakers. where is the advantage to that
> theory, unless he intends to write down the whole shebang for one
> major balance sheet correction. No one in their right mind would
> do that, even if y'all wanted to save America by building confidence
> in an aging and aged infrastructure, it makes no sense. Until the
> Secy of the Interior gets religion on coal and oil shale, this admin
> is in cohoots with the environuts who wish to stifle any additional
> commercial mining, drilling where there is loads of coal, oil and
> precious metals.Go read the latest roadblocks induced by the paranoid
> and crazy new EIR's promulgated by Secy Salazar. Y'all don't know
> a thing about hard commodities if you think Robber Baron Buffett's
> deal is about coal. Coal has a purpose in its comercial use and that
> it lights up your homes as electricity. Buffett could have bought
> all the major producers in the US for the money he paid for BNI.
> The deal could be some sort of derivative play on the value of the
> land and the right of way of the rails and this can easily be leveraged,
> sliced and diced, and sold to Wall Street and then bankable as a
> credit pool and sold for its righjts as a long term bond. all sounds
> familiar, don't it? Now, I really need my beignet and coffee at the
> Cafe du Monde, NOLA.

Nov 07 09:54 PM

[ManAboutDallas:]

Just about right, Roger. Let Occam's Razor give us the answer, shall we;

Buffett is buying railroads because they're going to be the most efficient way of moving what few goods there will be to move when diesel is $10 a gallon and still rising, and over the road truckers are renting out their parked on the sides of every road tractor cabs to ladies of questionable virtue for the purpose of providing their own special services.. He's not making any huge bet on the American economy, or on China; he's making a Hobson's Choice in deploying his ca$h while it still has any buying power, for anything.


On Nov 06 10:44 AM Roger Knights wrote:

> "The future is in containerized freight (both import/export) and
> domestic...rails do the long haul, motor carriers the pick up and
> delivery"
>
> Especially if there are penalties on CO2 emissions, which would benefit
> RRs at the expense of truckers.

Nov 07 10:02 PM

[TraderRob:]

Buffet's move here is indeed an "all in bet", perhaps on China, which may or may not instill lasting confidence. But it should be noted that his purchases of GS and GE during late fall of last year didn't have any major direction changing effects on the stock prices. In the end it's all about the fundamentals.

The premium paid for BNI was particularly hefty and suggest that we're all missing something that the Oracle isn't. It's not a complex move, because Warren is a simple man, but the gamblin' rhetoric expressed was not particularly directed at any results within the next three or even five years.

I don't suspect that the U.S. economy will wither away through the shroud of darkness, but I do expect for there to be particularly difficult times ahead for the rails and transports as a whole. Warren is a Value Guy to his death and sees a winner in Burlington, but we should all ask ourselves just how far back down the rabbit hole we'd be willing to follow him if/when this thing rolls over.

Nov 09 01:59 AM

[Mark Anthony:]

Damn:

It is hard to make a move before the market does. I have been watching PCX closely for nearly 4 months (since the bottom at around $5 in July). Never get a good chance to get into this coal play. Warren Buffett's bet on BNI adds some urgency to get into coal plays. But the market simply would not co-operate with me.

I am determined to buy some PCX on the next significant dip. For now, dry bulk shippers are still dirt cheap to buy. Better buy before Warren Buffett makes his next move. If he bought railway, dry bulk shippers are the next logical target.

Not sure if Warren has spare cash left to buy shippers, after he spent so much on railways.


On Nov 06 07:22 PM Mark Anthony wrote:

> Yes! I think more and more people are starting to get it:
>
> Railway transportation
> = Shipment of Coal Export to China
> = Needs to buy US coal producers (PCX, JRCC, ANX, ACI...)
> = Needs to buy dry bulk shippers (EXM, EGLE, TBSI, DRYS, etc.)<br/>
>
> Dry bulk shippers is one of the things I am most bullish on. Another
> is one critical precious metal that China has ZERO product, which
> China desperately needs to hoard, and which America has one of the
> world's most unique producer:
>
> The palladium metal, and Montana based SWC, Stillwater Mining.<br/>seekingalpha.com/autho...
>
>
> One thing I do not understand is Buffett's timing and pricing of
> his BNI acquisition. Maybe there is an urgency for him to get out
> of the US dollar cash positions ASAP, otherwise there is no good
> explanation of his bad timing and pricing.

Nov 09 02:39 PM

[Mark Anthony:]

Every one agrees Warren Buffett's railway move is ill times and way over-priced. As a patient investor Warren would normally wait for the best pricing before he buys, he rarely buy at the top of price.

There is only one explanation, that is, an urgency he needs to make the move quickly. This is a big bet on US dollar bear and US export economy bull, and he knew he needed to move quick. He is too big to make quick moves in smaller players, like dry bulk shippers. A big railway play is where he can bet $44B at a time.

Does Warren see an imminent collapse of the dollar, and the inevitability that we must export a lot of raw materials to China to balance the trades?

On Nov 09 01:59 AM TraderRob wrote:

> Buffet's move here is indeed an "all in bet", perhaps on China, which
> may or may not instill lasting confidence. But it should be noted
> that his purchases of GS and GE during late fall of last year didn't
> have any major direction changing effects on the stock prices. In
> the end it's all about the fundamentals.
>
> The premium paid for BNI was particularly hefty and suggest that
> we're all missing something that the Oracle isn't. It's not a complex
> move, because Warren is a simple man, but the gamblin' rhetoric expressed
> was not particularly directed at any results within the next three
> or even five years.
>
> I don't suspect that the U.S. economy will wither away through the
> shroud of darkness, but I do expect for there to be particularly
> difficult times ahead for the rails and transports as a whole. Warren
> is a Value Guy to his death and sees a winner in Burlington, but
> we should all ask ourselves just how far back down the rabbit hole
> we'd be willing to follow him if/when this thing rolls over.

Nov 09 02:49 PM

[Mayascribe:]

Mark: I've been grumbling today about missing (PCX), too. I had some and then sold it when the foreboding Cap'n Trade was all over the news last week. Then on Cramer, I heard Aubrey MacClendan, CEO of (CHK) state that Cap'n Trade, as the bill currently stands, actually favors coal over nat gas. That comment cought me off guard.

Then Buffet bought Burlington and up Patriot went. I am going to hold my nose and add to my measly 100 shares. I can't imagine the stock going down 15 to 20 % from here.

Nov 09 03:05 PM

[Mark Anthony:]

Mayascribe:

I was impressed reading PCX's recent earning's conference and the CEO says they are starting to sell metallurgic coal to China. That was well before Warren Buffett's railway buy. The CEO's claim is one piece of news that surprised me a bit and changed my prospect of US coal towards the bullish side, especially metallurgic coal.

Nov 09 04:57 PM

[Mayascribe:]

Agreed, Mark. Additionally, I enjoy reading your take on things. You are one of the most informed on this website. A real student of what's really going on in this nutty world.

I actually have more than 100 shares of (PCX), because I also have a brokerage account where Patroit is up about 40% after yesterday's and today's run up. In my e-gamer account I added some more today.

Nov 09 05:09 PM

[Mark Anthony:]

Mr. Market surely is on the slow thinking part.

I pointed out that after Warren Buffett bought railways, the next logical thing to think about are dry bulk shippers.

It took quite a few days for the market to figure that out. Today! BOOM! All dry bulk shippers rallied explosively: EXM, EGLE, DRYS, GNK, DSX, you name it. TBSI hasn't catch up yet but it should by tomorrow. I hope I have a chance to add some TBSI tomorrow before the price raises too much.

It will take people forever to realize the huge potential in the precious metal palladium, and the mining stocks SWC and PAL. It's OK, I will just keep adding more shares while the price is still cheap. Today is a great day for me.

On Nov 09 02:39 PM Mark Anthony wrote:

> Damn:
>
> It is hard to make a move before the market does. I have been watching
> PCX closely for nearly 4 months (since the bottom at around $5 in
> July). Never get a good chance to get into this coal play. Warren
> Buffett's bet on BNI adds some urgency to get into coal plays. But
> the market simply would not co-operate with me.
>
> I am determined to buy some PCX on the next significant dip. For
> now, dry bulk shippers are still dirt cheap to buy. Better buy before
> Warren Buffett makes his next move. If he bought railway, dry bulk
> shippers are the next logical target.
>
> Not sure if Warren has spare cash left to buy shippers, after he
> spent so much on railways.

Nov 11 04:00 PM

[Mayascribe:]

Mark: How 'bout them dry shippers! That Burlington derivative light bulb went off in my head Monday. I bought a little (EGLE) and (EXM), always never enough! Cramer was recommending (DSX) yesterday. Cheers! He got one right!

I've been watching (SWC). Missed it when it was troughing around $6.30- $6.50. Right now, though, Stillwater is above the 20, 50 and 200 day MAs. Money flow in is rising, but not quite as high as on 9/14 and 9/15. Also, a double top may be forming (I call that formation Batman's Ears; never good, unless inverted). SWC closed at $7.92. Technicals say buy at $7.83, where the 20 and 50 day are merging.

Already own PAL and holding to see what's happening around this 1100 S & P level, before I pick up more shares.

Nov 11 04:22 PM

[dieuwer:]

The bulb is now glowing extremely bright. China is planning a strategic coal reserve! And of course BNI will more than happy to rail the coal from the Midwest to Long Beach and subsequently on a ship to China. Buffett must have had Chinese insider info :)

Nov 12 09:20 PM

[sgt.red.blu...:]

Thanks, Texas_Technoman


On Nov 06 10:30 AM Texas_Technoman wrote:

>
> BNI is a much stronger player in the intermodal (trailer/container
> on flat car) sector than UNP. In fact, up until the current slowdown,
> BNI's intermodal traffic has grown more than all the other North
> American RR's combined. UNP is stronger in the Industrial Products
> sector (o/t coal), which feeds an industrial base in the US....that
> is shrinking. The future is in containerized freight (both import/export)
> and domestic...rails do the long haul, motor carriers the pick up
> and delivery....it's all about Intermodal!

Nov 20 03:15 PM