Nice Job, Warren: Buffett’s Railroad Hauls Cleaner Coal, Sidesteps Ugly Downturn

Berkshire Hathaway’s (BRK.A) (BRK.B) BNSF Railway unit is suffering least from the dramatic decline in the demand for coal among the nation’s power generators, further evidence that Warren Buffett chose the right railroad to buy.

CSX (CSX), Norfolk Southern (NSC), and Union Pacific (UNP) all endured a steeper drop in coal volumes in the first quarter than did BNSF. CSX experienced the worst, with a 16% slide. BNSF suffered only a 5% decline.

Coal is one of the biggest single items the nation’s railroads ship every year, making up 21% to 24% of the total volume and upwards of 31% of the company’s freight revenue. Despite stronger volumes in other freight categories, stocks in these railroads are feeling the pressure of the weakening demand in this historically key market, hurt be stronger environmental regulations and the plunge in natural gas prices.

< UNP Chart

UNP data by YCharts

Buffett’s BNSF falls somewhere in the middle in its reliance on coal, with it representing about 24% of its shipping volume in 2011 and 27% of revenue. But about 90% of the coal BNSF ships comes from the Powder River Basin, a huge area in Wyoming and Montana that has among the cleanest coal in the U.S., and also the least expensive to get at.

Growing demand for Powder River Basin coal has come at the expense of dirtier, and more expensive Appalachian coal in the Eastern U.S. That area is CSX’s territory. It’s the largest coal transporter east of the Mississippi River.

In recent earnings reports, both CSX and Union Pacific warned of even stronger headwinds in the second quarter for coal shipments. Union Pacific said Thursday that year-over-year second-quarter earnings growth would fall short of the first quarter’s 35% gain.

Wall Street expects percentage revenue growth for these railroads to be in the mid- to upper-single digit range in 2012.

UNP Revenues TTM Chart

UNP Revenues TTM data by YCharts

And except for Union Pacific, whose earnings per share are expected to jump 20% in 2012, same goes with earnings.

< UNP Earnings Per Share TTM Chart

UNP Earnings Per Share TTM data by YCharts

Michael McHugh is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings, stock screener and portfolio strategies.



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