Canadian Pacific Buys Like Buffett

Canadian Pacific (NYSE: CP) has rolled into town and bought itself an American railroad. Because of various contingencies, it's tough to put a price tag on the final purchase, but the move reveals the operator's train of thought when it comes to the U.S. coal and ethanol markets. The deal also demonstrates that America's greatest investor is right on track with his big bet on railroads.

Dakota, Minnesota & Eastern, the largest regional rail operator in the country, has been attempting to break into the Powder River Basin (PRB) coal market, which is dominated by Burlington Northern Santa Fe (NYSE: BNI) and Union Pacific (NYSE: UNP). The PRB is the Wyoming region that boasts abundant low-sulfur coal deposits, and hosts Peabody Energy's (NYSE: BTU) North Antelope Rochelle Mine, the country's largest. Dakota has failed to secure the hefty debt financing that an expansion into the PRB would require, so a sale of the company looks like the right move.

Canadian Pacific is not only eyeing the potential PRB coal-market expansion, but also Dakota's existing network. This will provide the firm with expanded access to bustling Midwestern agricultural and ethanol markets.

While the ethanol boom may not be a boon to the small-scale producers whose commodity spreads are getting squeezed, it's all gravy to the rail operators. It appears that large players like Archer Daniels Midland (NYSE: ADM) and VeraSun Energy (NYSE: VSE) will keep ramping up capacity in order to secure economies of scale. That's a great inducement for the railroads to cater to the industry's rapidly escalating transport needs.

And finally, as if we needed confirmation, the willingness of the railroads to pay handsomely for smaller railroad assets proves Warren Buffett's prescience. He's been buying BNSF, Union Pacific, and Norfolk Southern (NYSE: NSC) in size. And unlike Canadian Pacific, he's not paying a steep premium to trailing freight revenues. Call it choo-choo on the cheap.

Related Foolishness:

• Canadian Pacific is also eager to expand in oil sands country.
• This leading coal producer has hitched its fortunes to the PRB.
• Archer Daniels Midland's recent quarter was a bit muddled.