The company operates as something of a monopoly/duopoly in its bulk freight rail transportation business. With around a 49% market share in the regions in which it operates, BNI has only one real competitor, Union Pacific (UNP). The fragmented non-bulk trucking industry competes with BNI for business, but it’s hard for it to match the company’s success transporting bulk freight loads for which there is simply no other cost effective way for them to be moved.
Furthermore, if you think someone can come along and duplicate the miles of track laid by BNI and the huge capital expenses necessary to compete, think again. Not surprisingly, then, the company earns respectable returns on equity, and sports respectable margins. And while it appears highly leveraged, it has predictable operating performance to cover interest payments.
Also, the company continues to increase productivity while growing revenue and cash flow. It is expanding its rail system in anticipation of increasing demand, and is poised to capture more of the market and capitalize on its growth, however modest.
This is all somewhat of a simplification, but I believe the main thesis for Buffett is the company’s long-term competitive advantage and its reasonable pricing at the time he bought shares.