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What's Driving Berkshire Hathaway?

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Part 2
What's Driving Berkshire Hathaway? PART 2 OF 12

How Manufacturing Push Is Helping Berkshire’s BNSF

BNSF drives growth

Berkshire Hathaway’s (BRK.B) BNSF Railway has improved its performance in recent quarters on the rebound in coal shipments due to higher natural gas prices, a push for manufacturing, and a rise in agriculture output. Buffett has invested heavily in improving the technology and operating efficiency of BNSF, which has resulted in higher earnings before taxes.

In 2018, oil prices and thus natural gas prices are expected to remain slightly upbeat, which should continue to help coal shipments. The railroad giant can also expect continued demand for industrial and agriculture shipments, which should improve its overall operating performance.

How Manufacturing Push Is Helping Berkshire&#8217;s BNSF

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Industry outlook

Overall, the railroad industry (XLI) is eyeing better operating margins and a business shift from road transportation in a bid to garner more revenues. In 3Q17, BNSF managed a 2.8% rise in revenues to $5.3 billion on a year-over-year basis. In the first nine months of 2017, BNSF saw a 2.4% rise in average revenue per car unit and a 6.0% rise in volumes. The company also saw a 4.7% rise in tax earnings to $1.7 billion compared to $1.6 billion in the prior year. The growth was mainly due to higher volumes, pricing, and relatively lower growth in expenses.

BNSF is currently doing business in 28 US states and three Canadian provinces. It faces competition in the region from Union Pacific (UNP) and is compared in terms of performance with Canadian National (CNI) and Kansas City (KSU).

Consumer, industrial, coal shipments

Freight revenues of agriculture products fell 9.4% in 3Q17 mainly due to lower grain exports and volume declines partially offset by higher average revenue per car. However, BNSF managed to post strong growth of 7.6% in consumer, 4% in industrial products, and 5.9% in coal shipments mainly due to an uptick in natural gas prices. Marginally higher fuel expenses and a 2% rise in operating expenses led to an overall rise of 4.7% in earnings before taxes.

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