John Petersen
Did you know that both Warren Buffett and Bill Gates have billion dollar investments in railroads?
If so, did you ever wonder why?
For Mr. Buffett, it’s an indirect investment through Berkshire Hathaway, which bought the Burlington Northern Santa Fe railroad outright in February of last year. For Mr. Gates, it’s a direct 10.04% stake in Canadian National Railway.
The reason is simple. Railroads are the cheapest, cleanest and most energy efficient ground transportation networks in the world, which effectively guarantees them an increasingly important role as the world comes to grips with peak cheap oil.
Railroads aren’t just a little more fuel efficient than long-haul trucking. They’re up to four times more fuel efficient and getting better every year. A 2009 study commissioned by the Federal Railroad Administration reported that rail fuel efficiency varied from 156 to 512 ton-miles per gallon while truck fuel efficiency ranged from 68 to 133 ton-miles per gallon. According to the Association of American Railroads, U.S. freight railroads averaged 484 ton-miles per gallon in 2010, a 106% improvement over the industry average of 235 ton-miles per gallon in 1980. If we’d done that well with passenger cars, the fleet wide average would be up around 33 mpg by now.
Trucking is certain to remain a backbone element of the world’s transportation infrastructure, however the pressure to move loads from the highways to the railways can only increase as oil gets more expensive and emissions regulations get more restrictive.
One of the most appealing aspects for investors who are interested in the rail transportation sector is a limited universe of Class I Railroads, which the Department of Transportation’s Surface Transportation Board generally defines as carriers with over $400 million in revenue. The following table identifies the seven Class I Railroads and provides summary data on their rolling stock fleets, route networks, revenues, incomes and market capitalizations.
While most alternative energy investments are subject to a good deal of volatility and uncertain growth potential, railroads are about as green as fundamental value investing gets and their growth rates should be stunning for decades to come. I’m not one to blindly follow investment gurus, but in this case I believe the long-term fundamentals couldn’t be better. As we enter the age of cleantech, I believe we’ll also be entering a second golden age for railway transportation.
Disclosure: None.
