Private owneship vs publicly held corporations

Trains Magazine General Discussion
1

A recent short item in the last issue of Trains brought a question to mind regarding ownership of railroads.

BNSF, being a wholly owned subsidary of Berkshire Hathaway, appears to be fairing better than the railroads, and for that matter all publicly held companies that are invested in by stockholders. Why? Is it because the others are beholden to the investors who demand a return above the inequitable? Greed on the part of the investors or are they simply wishing a steady income from their investements?

I can see both sides of the equation, and were I a heavily committed investor I surely would want the best return on my dollars.

But, the latter question disregards what is best for both the railroad and the investor. Which stock would you prefer; Berkshire Hathaway or one publicly traded on an exchange that is subject to fluxuation every day at the whims of Wall Street?

I would like to hear point/counterpoint from those more familiar with economics than I am.I know where I would place my bets. Wondering what others think.

2

But Berkshire has other stockholders than Buffet. The question laways is: Is one stockholder suffucuently in control? Anshitz at D&RGW and then at SP is another example. Would you expect results to always be positive?

3

But UP is not doing badly. Neither is NS considering loss of coal traffic.

4

The difference between short term investment and long term investment. In many cases decisions based on short term results hamper long term benefits.

Buffet is in BNSF for long term results, not max profits tomorrow.

Institutional investors, which are the largest segment of publicly traded stockholders, want their profits quarter after quarter without looking 4 quarters, 8 quarters or more down the road.

5

So in the case of Guilford Ry aka Pan Am Railways is a private company that has to raise money thru private investors and banks which are more fickle then then the public markets on which CSX is traded.

6

Norm,

Any traded stock is subject to daily price fluctuations due to a huge number of factors that influence the price of any and all stocks all the time.

Berkshire Hathaway (BH) stock trades on the exchange and its price varies constantly. BNSF is a wholly owned subsidiary of BH. BH is both a conglomerate, owning a diverse group of businesses, and an investment fund, holding as it does large stock positions in several other companies.

Traded companies are loosely subject to market discipline, that is if stock buyers (which are dominated today by mutual funds, which in turn are usually the major assets in people’s 401-k retirement accounts) as a group think that the company has particularly good or bad earnings prospects, then they will bid stock prices up or down.

Stock price movement analysis has two components, both based on regression analysis. Beta is the term that relates to how this stock reacts relative to the broad market. It is a measure of sensativity. The market, really the index chosen to represent the market, has by defination a beta of 1. A beta greater than one indicates a stock that moves with the market, but more strongly. A beta less than one means that the daily movement of this stock price does not move in lockstep with the market. Beta is usefull as a measure of risk in a portfolio.

The other component is alpha. A high alpha stock is what all stockholders want. A strong positive alpha means that the stock is being bid up independent of the behavior of the total market. Think CSX in the first week after it was anounced EHH was coming to run the show. Strong negative alpha is the reverse.

BNSF is not subject to market discipline. It is subject to the demands of its owner, BH. None of us can see what this really is. Since BNSF is not traded it has no alpha or beta. Since BH has many businesses and stock holdings its beta will be closer to 1 than virtually all of its components would be, due to a mathmatical concept called "regression t

7

But there are speculators in the market that want to buy a stock, run up its price and sell (take their profit) and leave the carcus. They are not in it for the long run. Goose the earnings, run up the price, sell out. BH as I see it doen’t speculate, it looks for value and buys and holds the companies that it sees as good companies with a profitable future. Unlike the Hedge fund that took a stake in CSX and wants EHH to get the fat out and make it a lean machine and raise the dividend so the price goes up so they can make a big profit and then get out. Been done in the past many times. Earnings down, dam, we’ve got to stop maintaining the track, slow orders get ignored but dividends get paid. Can you say Pennsylvania RR?

8

amen

9

Warren Buffet is in it for the long haul. He has a great management team at BNSF and lets them run it the most efficent way possible. He does NOT interfere in their operations. They return profits and spend a lot of money to upgrade, maintain and increase capacity. This results in greater profits as time goes on.

10

To a significant extent, buying Berkshire Hathaway Stock is pretty much like buying into a mutual fund. You’re basiclly buying a bucket of stocks (companies BH owns) and trusting fund managers such as the Oracle of Omaha himself to look over the fund and extract a decent rate of return.

And by every available measure, he’s done pretty damn well.

11

BNSF has been investing heavily in its Northern Transcon over the last 6-7 years while simultaneously eliminating expensive bottlenecks on the Southern Transcon such as double track in Abo Canyon and a second Fort Sumner Bridge.

On the Southern Transcon, if memory serves me correctly, BNSF has only a second bridge and associatied approach ramps over the Missouri River at Sibley to complete double track on the Southern Transcon, but that will be a very expensive project to finish and will take a while.

Berkshire Hathway seems content to have net profits in the range of 16%-20% of gross revenue falling to the bottom line of the parent company.

For the last five years, BNSF has had the following financial performance in billions:

Revenue Net Income NI % of Rev Op Ratio

2012 $20,835 $3,372 16.2% 70.7

2013 $22,014 $3,793 17.2% 69.1

2014 $23,236 $3,869 16.7% 69.2

2015 $21,967 $4,248 19.3% 64.0

2016 $19,829 $3,569 18.0% 65.5

It looks like BNSF will have revenues bumping back up over $20 billion for 2017 with profits in the $3.8 billion range.

BNSF is competing hard to get as much intermodal revenue as possible to replace lost coal loads - traffic is up but overall revenue per load will likely be lower because of intermodal revenue per load being lower th