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Burlington Northern Chugging Along


After seeing the reports of the other rails last week, BNI is shaping up as a must own for everyone's portfolio.

"Tonight I'll sing my songs again, I'll play the game and pretend
But all my words come back to me in shades of mediocrity
Like emptiness in harmony I need someone to comfort me"

- Homeward Bound (Simon & Garfunkel)

Music has always played a huge role in my life. I like to think that if everyone were to sit down and map things out, each person could create a soundtrack for his or her life. It would be incredibly difficult to whittle my soundtrack down to a manageable list, but one thing for certain, Homeward Bound would be included.

My most vivid memory of the song took place somewhere along I-95 on the way home from college for Thanksgiving in 1982. I think the station was DC101, the local Washington D.C. rock station, and I remember the DJ saying something to the effect of, "this goes out to all of you driving home for Thanksgiving." It's funny how things stay with you, but I can remember that moment like it was yesterday and I am still overcome by a great feeling of calm. And now for one of the worst segues in written history.

For whatever reason, the sounds of freight trains off in the distance have also provided a great deal of comfort to me over the years. There is something "reassuring" about the whistle of a train late in the evening in the quiet of your home. For a moment your mind can wander, thinking about the final destination of the freight train that seems to go on forever. The pure simplicity of it is spellbinding.

Last week, what was spellbinding were the earning reports of some of the major railroads. Lets take a quick look. Norfolk Southern (NSC) reported its 4th quarter on January 22nd. EPS came in at $1.02 versus Street consensus of $0.91. NSC also increased its dividend to a current yield of 2.3%. CSX Corp (CSX) also reported its 4th quarter EPS of $0.85 versus Street consensus of $0.64. The company went on to say it expects to see free cash flow before dividends of $800 mln to $1 bln by 2010. On January 24th, Union Pacific (UNP) reported a 4th quarter of $1.86 versus consensus of $1.76. UNP went on to say it sees another "record year" in 2008.

Burlington Northern (BNI) is due to report its 4th quarter tomorrow morning before the bell. The Street is looking for $1.39 EPS on $4.07 bln in revenues. It is important to point out what should be "in the stock" already. On October 23, 2007 during the company's 3rd quarter report, Burlington Northern said that 4th quarter EPS would be flat with the prior year's report. It went on to say that fuel would be a $0.17 headwind going into the 4th quarter. But given the earnings reports of the other rails last week, BNI should "knock the cover off the ball" tomorrow.

Burlington Northern is a very interesting way to play the commodities story: specifically, coal and agriculture. According to BNI's website, "the coal hauled each year by BNSF Railway could produce more than 10% of the nation's total electricity." BNI supplies 60 utilities in 28 states with direct service from 40 coal mines in eight states. If you have even remotely followed the story at Potash (POT) and some of the agriculture stocks like Monsanto (MON), you have come to realize how powerful that story has been. This too, plays right into the wheelhouse of Burlington Northern.

The most powerful story behind the stock may not be the fundamentals at all however. Warren Buffett's Berkshire Hathaway (BRK-A) has very quickly built up a 62.5 mln share position in BNI, or just about 18% of the outstanding shares. Buffett's investment in the rails seems to fly in the face of all the talk about a recession here in the United States. What is safe to say is that Warren and his band of Berkshire faithful have thoroughly done their homework.

The move higher on the original announcement of his foray into rails has come and gone. Early last year we saw the stock rally from $77 to $95.47. With the talk of a slowing U.S. economy and a very turbulent U.S. stock market, the stock has come all the way back to the low $80's. I think given the position Buffett is building coupled with the strong reports of the other railroads last week, BNI is setting up for a great quarter. On a valuation basis, BNI is a tad richer then its peers, but not enough to cause concern. Except for a brief move down to $77, the $80 level has provided a nice support level since early last year. Making the not so bold assumption that Warren Buffett has done his homework, and after seeing the reports of the other rails last week, BNI is shaping up as a must own for everyone's portfolio.
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No positions in stocks mentioned.

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