3…2…1… Liftoff! Alright so this is going to be my first blog post, going to start it off with just some random musings since I didn’t have anything planned (and our presentation is taking up chunks of free time). So, here goes.
Everyone was buzzing about Buffett’s deal for Burlington Northern yesterday. Every financial newspaper rolled out the obligatory article with some variation of “is Burlington Northern worth this valuation?” or analyzing the cash/stock ratio of the deal. With all due respect, they’re missing the point. I don’t doubt that Buffett has a very good valuation of the company, and I’ve been bullish on transportation myself (obligatory tooting of my own horn). My question is why did Buffett choose Burlington Northern? It’s not the only railroad with a large rail system in the Midwest-West. In fact, of the 4 largest railroads (CSX, Union Pacific, BNI, NSC) you have an even split of CSX/NSC in the East and BNI/UNP in the West.
So I’m going to try to follow Buffett’s perspective here. First off, the Western two railroads have an inherent advantage of terrain. Why? The sheer amount of land they cover is much, much larger as well as touches the Gulf and Pacific. I’ll get into why that’s advantageous in a moment. If you’re not sure that it actually is larger, hark back to 3rd grade Social Studies when you learned about the Louisiana Purchase and subsequent land grabs. Alternatively, here’s a handy picture ripped straight from Union Pacific’s Annual Report.
