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Burlington Northern Leads Railroad Charge


Tricky tape, but train trade intact.


Nigel Tufnel: "The numbers all go to eleven, Look, right across the board,
eleven, eleven, eleven and...."
Marty DiBergi: "Oh, I see. And most amps go up to ten?"
Nigel Tufnel: "Exactly"
Marty DiBergi: "Does that mean it's louder? Is it any louder?"
Nigel Tufnel: " Well it's one louder isn't it? It's not ten. You see, most blokes, you know, will be playing at ten. You're on ten here, all the way up, all the way up, you're ten on your guitar. Where can you go from there? Where?

--From the fantastic movie "This Is Spinal Tap"

Nigel of course was talking about the volume of his amp, and how his amp goes to eleven "when you need the extra little push off the cliff". Well although it felt like we jumped off a cliff on Friday, the volume that I witnessed didn't even come close to eleven. As a matter of fact, volume was closer to five then it was eleven.

It is great when you have an entire weekend to examine the fallout from a market session such as we saw on Friday, February 29th. What struck me most interesting as I went over the day in a bit more detail, was the relatively light volume we saw in some of the day's largest lowers. Mining giant Freeport-McMoRan (FCX) was down about 5.3% on less than normal volume. Goldman Sachs lost 4% on 11.1 million shares or about 1 million less than normal. Even Citigroup (C), which to some represents the epicenter of all the markets woes had a light volume day despite being lower by more than 5%. But what does that mean in terms of how we trade today and for the balance of the week?

I would love to be able to say that Friday was the capitulation day that we have all been looking for. But in crawling through the wreckage of Friday's market, I am unable to do so. Although we may see a bounce of some sort today, I fear that Friday has set us up for another leg lower at some point this week. Given that thought process, this is how my plan of attack will look. There are certain segments of the market where business has never been better - and to a large extent, despite the difficult market conditions, the companies have been rewarded in terms of stock price appreciation.

Railroads are one such sector. One need only to look at the price action in Burlington Northern (BNI) over the last couple of months to understand that "something" is going on with the rails. After trading as low as $74.20 on January 22nd, BNI has been absolutely explosive ever since, topping out just north of $91 as recently as February 26th. But moves of that magnitude in most industries let alone railroads are unsustainable and BNI has since pulled back to $87 and change.

Although it may appear to some that the trade in railroads has "already left the station" I would argue to the contrary. On January 29th, BNI reported its 4th quarter. Its EPS of $1.46 easily beat Street consensus of about $1.39 on revenues of $4.25 billion. The quarter was driven by "record quarterly revenues and volumes for both agriculture and coal" according to the companies press release. BNI went on to say that full fiscal year 2008 EPS growth will be in the low double digits based on a positive outlook for both coal and agriculture based on the still present global demand story. Now Wall Street is starting to get "on board". On February 14th, Bear Stearns raised its price target on some of the railroads including Burlington Northern, taking the target on BNI to $102 from $89.

Of course the real visionary on the rails has been no other than Warren Buffett. Back in April of 2007, Berkshire Hathaway (BRK-A) disclosed a 39.03 million share, or 10.9% stake in BNI. Since then, Berkshire's stake in the company has grown to about 62.5 million shares. Love him or hate him (but how could you hate him?), there is no denying that Warren and his troops have done their homework on the rails.

Burlington Northern currently trades around 17.50 times trailing and 13 times forward earnings. This valuation puts BNI pretty much in line with other rails such as CSX Corp (CSX) trading at 16.50 times trailing and 13.50 times forward earnings and Union Pacific (UNP) which trades at 18 times trailing and 13 times forward earnings. BNI also pays a nice little dividend of 1.4%.

I think we are in for a difficult week of trading. But the railroad story is still in tact and bolstered by existing global tailwinds that should be in place for some time to come. Put BNI on your radar screen, I think a great entry point can be found around the $84.50 to $85 level. I know I am going to be watching it very carefully this week!

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No positions in stocks mentioned.

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