Buffett Was Right to Ride the Rails

After Berkshire Hathaway paid a 30% premium over the pre-bid share price to take railroad Burlington Northern Santa Fe into its fold, I encouraged investors to attempt to outplay Warren Buffett with a parallel stake in one of the remaining high-quality North American haulers.

Much of the railroad industry has delivered substantial share-price gains since that landmark acquisition, led convincingly by smooth operator CSX (NYSE: CSX  ) . As we pause here to examine first-quarter earnings performance by rivals Norfolk Southern (NYSE: NSC  ) and Canadian National Railway (NYSE: CNI  ) , the underlying conclusion is inescapable that Buffett's "all-in wager on the economic future of the United States" targeted an industry that was prepared to deliver returns even before the economic future of the United States can be confidently known.

Norfolk Southern chugged its way into a remarkable 32% profit surge to $0.90 per share, squeezing every last drop from a 17% increase in operating revenues amid rising costs. Fuel costs skyrocketed 53% to $135 million, but railroads are experts at adapting seamlessly through fuel surcharges. Overall freight volume increased by 8%. Norfolk's intermodal network, which FedEx has selected as its primary railroad hauler in the East, leveraged a 10% volume increase into an 18% jump in revenues for the category.

Looking to coal, which accounts for 31% of Norfolk's operating revenue, the hauler increased its coal volumes hauled to yield a powerful 30% increase in coal revenues. Norfolk shipped 13% more coal to utilities than it had for the prior-year period, but the greater driver of growth can be seen in the 24% increase in coal bound for export. Norfolk shipped 7.5 million tons of coal overseas during the quarter, while the annual capacity of 48 million tons at its Lamberts Point Coal Terminal in Virginia suggests a strong capacity to service further increases in export coal demand as Appalachian miner Patriot Coal and others have forecast.

Norfolk rival Canadian National Railway produced a more muted earnings result that featured just a 6% revenue increase and a 12.5% jump in adjusted earnings. Total carloadings rose only 3% over the prior-year period, but that didn't dissuade Canadian National from raising its 2011 guidance to anticipate 15% growth in earnings per share. Canadian National continues to lead the pack with a lean operating ratio of 69%, but the metric has risen sharply over recent quarters and threatens to permit CSX to slip into the top spot as that company targets a "high-sixties" operating ratio for 2011.

All of the major North American railroad operators have proven their agility, efficiency, and resiliency in spades throughout this challenging period of gradually resurgent freight demand. In the final analysis, I still think Fools have a fair shot at matching or beating Warren Buffett's percentage return on the Burlington acquisition by employing the same long-term, buy-and-hold approach with any of the quality haulers discussed above.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets.

Chris owns no shares in the companies mentioned. Berkshire Hathaway is a Motley Fool Inside Value choice. Berkshire Hathaway, Canadian National Railway, and FedEx are Motley Fool Stock Advisor recommendations. The Fool owns shares of Berkshire Hathaway and FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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