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How Berkshire’s Investments into BNSF Are Proving Profitable

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Mar. 9 2016, Published 4:26 p.m. ET

Manufacturing and coal

In 2015, Berkshire Hathaway’s (BRK-B) revenues from railroads were impacted severely by falling manufacturing activity as well as coal prices and production. Manufacturing activity was impacted by the strong dollar and the rising cost of manufacturing in the United States. Coal production was impacted by falling natural gas prices. Natural gas is used as a clean source for electricity production.

However, the investments Berkshire made in railroad giant BNSF (Burlington Northern Santa Fe) Railway yielded results. The division reported $4.2 billion in net income for 2015, up from $3.9 billion in 2014.

Berkshire Hathaway posted revenues of $5.4 billion in 4Q15 for its subsidiary BNSF Railway, compared to $6.2 billion during the same period last year. In the fourth quarter, the company saw improved construction, housing, and agricultural shipments offset by lower coal and industrial shipments.

BNSF benefited from an improved operating performance in 2015. In 2014, its operating performance was affected by significant service-related challenges.

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Berkshire Hathaway owns and operates BNSF, one of the largest railroad systems in North America. BNSF has ~33,000 miles of track in 28 US states and three Canadian provinces. Berkshire Hathaway purchased BNSF’s remaining stake of 77.4% in 2009 for $26 billion, making it the company’s biggest acquisition to date. BNSF competes with Union Pacific (UNP) in the West, where it has an approximate market share of 49%.

Investments and outlook

Earnings before taxes for BNSF fell to $1.7 billion in 4Q15, compared to $1.8 billion in the same quarter last year. BNSF benefited from lower fuel costs and higher freight revenues on agriculture shipments. The company expects these investments to yield further improved operating performance, as the strong dollar is expected to impact manufacturing.

While China and Europe are focusing more on domestic demand, manufacturing could still receive some support in the United States.

BNSF’s competitors

BNSF competes with other major railroad players. They reported the following revenue rises in the last fiscal year:

  • Canadian National Railway (CNI) — 14.7%
  • Union Pacific — 9.2%
  • Kansas City Southern (KSU) — 8.8%
  • Canadian Pacific Railway (CP) — 7.9%
  • Genesee & Wyoming (GWR) — 4.5%
  • Norfolk Southern (NSC) — 3.4%

Together, these companies form 9.3% of the Industrial Select Sector SPDR ETF (XLI).

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