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Burlington, CSX Ride Rails of Rebound

BOSTON ( TheStreet) -- Few industries are as old school as railroads.

Fittingly, one of the most old-school investors, Warren Buffett, is heavily invested in the industry, with a 23% stake in Burlington Northern Santa Fe (BNI) through his company, Berkshire Hathaway (BRK.A - Get Report). The Oracle of Omaha's investment has outperformed the S&P 500 Index over the past year by about 5 percentage points. Burlington's stock has fallen 11%, less than the 16% drop of the benchmark. Railroads may seem antiquated, but a mix of factors makes them an attractive, although cyclical, bet.

Michael Porter's five forces of competition applied to the railroad-shipping sector highlights some of the reasons this is an attractive investment as the economic recession ends.

Degree of Rivalry

Due to so-called trackage rights, competition isn't always direct. Major companies may not even own rail tracks in the same region, cutting competition between big-name players. Also, because of trackage rights, companies like Union Pacific (UNP - Get Report) and Burlington Northern, which own rail stretches in the western half of the U.S., need to remain amicable with companies including CSX (CSX - Get Report) and Norfolk Southern Rail (NSC - Get Report), which own railways in the eastern half to ensure that access to rail on cross-country treks stays relatively reasonably priced.

Regional concentration also adjusts the main products hauled by each company. Obviously, CSX, which has access to the Gulf of Mexico, will be competing for the hauling of fuels, while Union Pacific will be mainly focused on containers of goods coming from Asia through western ports.

Bargaining Power of the Customer

Volume holds the key to major success for rail companies. During the recession, the volume has dropped substantially as production and consumption has slowed to a crawl. That makes rail shippers cyclical, which can be seen in the double-digit decline in the stocks over the past year.

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BRK.A $217,665.09 -0.93%
CSX $33.10 -0.75%
NSC $102.92 -1.00%
UNP $108.25 -1.70%
AAPL $124.49 -1.50%


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