At the 2024 Berkshire Hathaway meeting, Warren Buffett stated that one of its businesses would still be going 100 years from now. The subsidiary is Burlington Northern Santa Fe – its freight railroad.
That’s about as long term as it gets. And while investors can’t buy shares in BNSF directly, I think other US railroads – such as CSX (NASDAQ:CSX) – look like good stocks to consider buying.
Buffett on railroads
Freight railroads like CSX move things like chemicals, commodities, and consumer products around the US. And Buffett’s probably right in thinking this will still be happening a century from now.
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The only question is how and there’s a good case for thinking it will be by train. Right now, moving freight by rail’s significantly cheaper than putting it on a truck – the main alternative.
According to CSX, a truck can move a ton of freight 134 miles using a gallon of fuel. Its trains, by contrast, can manage 506 miles at the same cost.
That gives rail an important advantage over trucking when it comes to moving freight. And railroads also enjoy a lack of direct competition – each operator only has one major rival in its region.
CSX, shares the Eastern US with Norfolk Southern. And as Buffett notes, the cost and complication of building new rail infrastructure makes the emergence of new competitors highly unlikely.
This is why Buffett thinks BNSF’s a business that can endure for another century. And I think the key parts of the Berkshire Hathaway CEO’s thesis apply just as well to other US railroads, including CSX.
What are the risks?
Not everyone sees things this way. Back in 2020, Cathie Wood’s ARK Invest published a report saying it expects autonomous electric trucks to be taking market share from freight rails by 2025.
We haven’t reached 2025 yet, but it’s fair to say this hasn’t happened, so far. Nonetheless, the competitive landscape’s been shifting. Despite their cost advantage, railroads have been losing market share to trucks over the last 10 years. The reason is service has been poor – focused on margins instead of customers.
The Surface Transportation Board’s also introduced reciprocal switching rules. As a result, if a rail operator falls below certain standards, they now risk losing their business to a competitor.
That means the likes of CSX are going to have to focus on improving their service to customers. And this might come at the expense of profit margins – which have historically been outstanding.
This is clearly a risk, but I think it could also be positive. Improving service to avoid competition from other railroads could well put CSX in a position to reclaim market share lost to trucks.
Why I’ve been buying
With the appointment of Joe Hinrichs – a former Ford executive – CSX has already made a big move towards being responsive to the needs of its customers. I think this is very positive for the near term.
I also think the stock looks like good value and have been buying it. A price-to-earnings (P/E) ratio of 18 for a company in an industry Buffett thinks will still be going 100 years from now looks like a good deal to me.
