Warren Buffett targets companies with moats, but these days the easiest moat to identify for Burlington Northern Santa Fe
Burlington Northern rattled the railroad sector by posting a 30% decline in earnings amid a 27% fall-off in freight revenue. Although the railroads presented a consensus view that business conditions had bottomed out during the second quarter, and marginally improved sequential freight volumes confirm that they have for now, Burlington Northern's revenue decline still outpaced the 26% decline noted last quarter.
I suspect that the substantial barrier separating demand stabilization from sustainable demand recovery is not quite the moat that Berkshire Hathaway
These volumes are much improved from the 22% declines reported by CSX and Union Pacific
Union Pacific CEO Jim Young extended his cautious outlook into 2010: "I think next year we're going to be hard-pressed to see much of a volume increase." To date, railroads have exhibited a laudable capacity to increase operational efficiency to absorb revenue declines, but without a true recovery in demand, that ability can take the sector only so far.
I would like nothing more than to endorse Warren Buffett's choice in the railroad sector as best in class, but the operator's combined debt and deferred income taxes have climbed to more that $19 billion. That's some heavy cargo! While the company's operating ratio of 74.2% is respectable, it nonetheless stands some 1,150 basis points above that reported by my preferred operator: Canadian National Railway
My readers know that I have taken a cautious view of the North American railroad sector for several quarters because of deep-seeded fundamental challenges to sustainable recovery within the domestic industrial base. It's time for you to make your opinions known through our Motley Fool poll.
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Fool contributor Christopher Barker has never hopped a freight train, but he thinks it would be a fun place to learn the harmonica. He owns shares of Peabody Energy. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He also tweets.
Berkshire Hathaway and Canadian National Railway are Motley Fool Stock Advisor recommendations. Berkshire Hathaway and USG are Motley Fool Inside Value recommendations. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy never plays on the tracks.