Berkshire Hathaway has agreed to acquire railroad Burlington Northern Santa Fe (BNI) for US$34 billion ($100 per share). Berkshire previously owned 22% of BNI prior to the deal. Buffett is essentially making a huge bet on the future of the U.S. economy.
The deal “is a very high-profile catalyst that we think will spark some added interest in the group,” said RBC Dominion Securities analyst Walter Spracklin. “It's a big bet on a solid industry.”
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To accommodate railway deal, Berkshire plans to split ‘Baby B' shares 50-to-one; shares will be worth around $65 (U.S.) apiece
CN, which counts Bill Gates's Cascade Investment LLC as a key shareholder, can't be taken over outright due to ownership restrictions, Mr. Spracklin said. CP, meantime, has been a takeover target in the past.
Rail is more environmentally sound than trucking. One freight train can move a ton of cargo 436 miles on a single gallon of diesel and can carry the load of 280 trucks.
There's no shame in being a coattail investor, especially when that coat belongs to Warren Buffett.
RBC Dominion Securities analyst Walter Spracklin has examined which of the freight carriers look the most attractive, and his top picks for the rail sector are Calgary-based CP and Jacksonville, Fla.-based CSX.
An investment in CP amounts to a bet on China, potash and metallurgical coal. CP is hoping for China to secure long-term contracts with potash export consortium Canpotex. The railway is also counting on reaping favourable freight rates from Teck Resources Ltd.'s Elk Valley operation that produces metallurgical coal, which is exported to Asian steel mills.
CP has a price-to-earnings multiple of 10.8 times next year's estimated share profit, a bargain compared with the multiple of 15.5 times in the BNSF transaction, Mr. Spracklin said in an interview. “Warren Buffett paid 15.5 times, and now investors can get the other rails for an average of 11.4 times.”
CSX looks undervalued with a multiple of 9.5 times, and the railway is positioned to transport increasing amounts of thermal coal, which is used by U.S. utilities, he said.
Mr. Spracklin has “outperform” ratings for CP and CSX. He likes the rail sector generally, noting that CN's multiple is 13.6 times next year's estimated share profit, Norfolk Southern's is 11.1 times and UP's is 11.8 times – all still lower multiples than what Berkshire is paying for the rest of BNSF that it doesn't already own.
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