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Berkshire’s BNSF Railway Continues to Suffer from Coal and Manufacturing

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May. 16 2016, Updated 7:06 p.m. ET

Manufacturing and coal

In 1Q16, Berkshire Hathaway’s (BRK-B) revenues from railroads were impacted severely by falling manufacturing activity as well as by coal prices and production. Manufacturing activity was impacted by the strong dollar and the rising cost of manufacturing in the United States, and coal production was impacted by falling natural gas prices. But the BNSF division reported $1.3 billion in net income for the first quarter of 2016, which is below the $1.7 billion it saw in 1Q15.

Berkshire's BNSF Railway Continues to Suffer from Coal and Manufacturing

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Berkshire Hathaway posted revenues of $4.8 billion in 1Q16 for its subsidiary BNSF Railway, as compared to $5.6 billion during the same period last year. In the first quarter, the company saw a continued decline in demand for coal and certain industrial products categories. These revenues reflect a 10.4% decline in average revenue per car per unit and a 5.5% decline in volume.

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%.

BNSF’s competitors

BNSF also competes with most other major railroad players. These railways reported the following revenue rises in the past fiscal year:

  • Canadian National Railway (CNI)—14.7%
  • Union Pacific (UNP)—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 make up 9.3% of the Industrial Select Sector SPDR ETF (XLI).

Investments and outlook

BNSF benefited from lower fuel costs and higher freight revenues on agriculture shipments. In 2016, freight revenues from industrial products were $1.2 billion—an 18% decline from 2015. The decrease reflected lower volumes for petroleum products, frac sand, taconite and steel products.

In the next part, we’ll take a closer look at Berkshire’s energy business.

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