One of the relatively recent acquisition's by Warren Buffett's Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.54%) is the railroad formerly known as Burlington Northern and Santa Fe, now named BNSF Railway. In this episode of "The Rank" on Motley Fool Live, recorded on Feb. 28, Fool.com contributors Jason Hall, John Bromels, and Travis Hoium discuss how BNSF's ability to generate cash is helping to keep its parent company on track.
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John Bromels: No. 2 was Burlington Northern Santa Fe, of course, which is known as BNSF now, as per the engine behind me, the locomotive. It's a railroad. It's a comparatively recent acquisition for Buffett. This is, what is it, late 2000s, so certainly not as far back as some of his other investments. But I like railroads for Buffett because it's a Buffett-y stock. I feel like its infrastructure, its economies of scale, it's a brand even though it's not a consumer brand, and these are again very strong cash cow businesses. They have a set route and destinations that they travel to, their infrastructure is in place. It is a high barrier to entry and it just will keep churning out cash over and over. This is almost the opposite of my previous thing. I ranked my stocks in terms of just straight numerically how much they've returned for Buffett. This one has not necessarily returned as much for Buffett as perhaps some of these others, but I think this is going to be a business that continues to just do well, churn out cash over and over for the long term.
Jason Hall: They've entered into BNSF in 2008. They owned about a quarter of it before they made essentially an acquisition. They own over 90 percent now, but this was really interesting is Buffett rode in there because it is one of their four giants, one of the four big ones. Earned $6 billion last year, and I think that was what, 30 times. I can't find the exact number, it's in here somewhere. But there were some numbers alike that increased in earnings that has generated from when Berkshire acquired the business is enormous, but I think this is very much the economic barriers, high economic entry.
Bromels: High barrier to entry.
Hall: You're just not going to build another railroad.
Bromels: You're not. We've seen what problems people have encountered when they try to build new rail lines. If you're trained aficionados and have been following the ongoing saga of high-speed passenger rail, attempting to get that passed; there's just so many, it's very similar to the sagas of getting new oil and gas pipelines passed. It's trying to get the permits, trying to get the land, attempting to get regulations drawn up so that you can throw it in, and essentially that is why basically the railroad lines that exist today are the same ones that have existed for decades and centuries, because it's just so hard to build new ones or to find any place to put new ones even if you wanted to build them.
Travis Hoium: It doesn't really seem like anything that's going to go away anytime soon. You could say there's disruption coming to a lot of different businesses, but rail is one of those that it just seems like [inaudible 04:33:02].
Hall: Yeah, this is one where I think what's changing is the same thing that we're seeing in a lot of commercial transportation and that's the acceleration of technology to offset the carbon production. Over 80% of its carbon footprint is from diesel to run its locomotives, and you're starting to see electric locomotives show up, full electric. Because these are diesel electric, they are big diesel generators that run electric motors that move the trains, but getting battery electric is a big thing, and then hydrogen, and all of those. It's really interesting what's happening there.
Bromels: I would say one of the things that has surprised me about locomotives is even the diesel locomotives. Once a train gets up to speed and is moving, it takes very little fuel, very little power to actually keep that train going. Also I looked it up, 2010 is when Buffett bought the remainder of BNSF.
Hall: That was their acquisition.
Hoium: That was their acquisition.
Hall: 2000 they took an equity stake, built it up to about 25 percent and then.
Bromels: Bought the rest.
Hall: In 2010. Thanks, John.
