One on One with Thomas Wadewitz, Transportation Equities Analyst, J.P. Morgan
Monday, April 09, 2007
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SUSIE GHARIB: Railroad stocks surged today on word that Warren Buffett's Berkshire Hathaway has taken nearly an 11 percent stake in Burlington Northern Santa Fe. Berkshire Hathaway has also acquired smaller stakes in two other rail companies. The names of those companies have not yet been released. Shares of Burlington Northern rose 6.5 percent today, while Union Pacific jumped almost 4 percent and CSX added more than 2 percent. Joining us now with more analysis, Thomas Wadewitz, transportation equities analyst with JPMorgan. Hi, Tom.
THOMAS WADEWITZ, TRANSPORTATION EQUITIES ANALYST, JPMORGAN: Good evening.
GHARIB: Let's begin talking about Burlington Northern. Is that a good stock to own?
WADEWITZ: Yeah, I'd give you some comments on the rail industry story. There's a very strong pricing story which has been in place for a couple of years. Our own view is that the industry's story on pricing will continue for a few more years. Burlington has some company specific factors which give them a little bit better growth outlook overtime. I think if you have a long-term perspective, Burlington Northern is probably a pretty good stock to own.
GHARIB: Why do you think Warren Buffett is interested in railroad stock?
WADEWITZ: Well, obviously that's the question of the day. If you look at the railroads, the stocks have been good performers the last couple of years so, you know, we're trying to figure out what does Warren Buffett know today that makes him a big investor when they've already had such good performance. I think it's probably a sense that this rail pricing story that I've talked about is not just a two- or three-year phenomenon, but that it really is a change in the industry dynamic that will last over the next couple of years. In terms of Burlington Northern specifically, they do have leverage to strong growth in coal volumes out of the Powder River Basin. They have a strong inter-modal franchise which is leveraged to growth in trade. And they also have good leverage to the ag economy. So those are all factors which Warren Buffett could potentially be looking at.
GHARIB: What about competition that Burlington Northern faces?
WADEWITZ: Well, the way the railroad industry has evolved, there are essentially two primary competitors and three different regions so Burlington Northern's primary competitor is Union Pacific. I think both of them have some capacity constraints at the present time so your competitive environment is pretty favorable at the present time.
GHARIB: As we mentioned a moment ago, Warren Buffett also invested in two other smaller stakes in two other rail companies. Any thoughts on who those companies are?
WADEWITZ: You know, it's tough to know what he's looking at. I would say that Union Pacific because of some of the similarities to Burlington Northern in particular, they also are a transporter of coal from that low cost x`called the Powder River Basin. They also serve the west coast ports. So I think Union Pacific is a likely choice. That's actually a stock that we actually favor as well. You've got four other U.S. and Canadian railroads to choose from. So I think it's, you know, it's tough to tell which would be the third choice for Warren Buffett among the major railroads.
GHARIB: You mentioned Union Pacific as one of the stocks you're recommending. Are there any other rail companies that you find attractive these days?
WADEWITZ: Well, we tend to set our ratings on really a six- to 12- month type of basis. So Union Pacific is the one where we have a lot of conviction both on a near-term basis and on a multiyear type of basis. That is really the name that we would focus on. I think we do have a little bit of concern for the group on a near-term basis that some of the softness in the goods-producing part of the economy is leading to an interesting earnings performance in the near term. That's why we're really focused on Union Pacific in particular. And when I talk about the positive trends, I really think they're more of a medium-term, long-term type of trend.
GHARIB: Tom, do you own Union Pacific stock or does JPMorgan do any business with it?
WADEWITZ: Yeah, I believe that JPMorgan does do business with Union Pacific. I do not personally own any Union Pacific stocks.
GHARIB: Real quick, we have a little time left. Given the run-up in these stocks today for individual investors, is it too late to buy into these stocks and conversely if you own these stocks, is it time to take profits?
WADEWITZ: Well, I think a lot of that depends on your time frame. I mean, if you're looking at, like I said, a kind of a six to 12-month horizon or if you're more near-term oriented than that, I think you've had a very good run in these stocks. It probably does make sense to take some off the table, take a bit of profit. If you're looking for stocks that you're going to put away and hold for five years, then I think you'd have a lot less sensitivity to some of these near-term situations. In that case you'd be more comfortable continuing to hold them.
GHARIB: All right. Thank you very much for coming on the program.
WADEWITZ: Thanks, Susie.
GHARIB: My guest tonight, Thomas Wadewitz, transportation equities analyst with JPMorgan.
