Tuesday, November 3, 2009

Warren Buffet Bets on America - Really?

The recent news of Bershire Hathaway's $26 billion purchase of the remaining equity of Burlington Northern it does not own has been touted as Mr. Buffett's bet on America. Hardly. The purchase, while large in dollar terms is not terribly risky, given the company's knowledge of the railroad as part-owner and the strategic value of the asset as the most economical form of mass transport for commodities and high weight/value industrial goods. Commercial rail has always had a healthy prognosis (this cannot be said for passenger rail) in this country. As the cost of energy increases and the White House's greening push intensifies, the value of rail can only increase. The valuable right-of-way enjoyed by railroads in urban and suburban precincts is itself an inimitable and rare asset that confers a monopolistic advantage with stable rent streams. The challenge for Berkshire is to reinvest the cashflows to improve the infrastructure and technologies that make the business valuable. This is necessary to increase the capacity to meet rising demand. But it will be difficult, given the current economic recession and the implied cost of capital represented by the premium in the takeover price.

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