Commentaries

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A bet on America? More like a bet on a black future

“Warren Buffett bets $27 billion on America” was how the FT greeted Berkshire Hathaway’s acquisition of the biggest train set in the West. Heritage, romance, aesthetics, and a green tinge to boot, those babies have everything. You can almost hear that ol’ whistle blowing.

 But what’s that in the trucks behind the magnificent machines? Well, coal, mostly. Burlington Northern Santa Fe, as Buffett’s new train set is called, carries 600 million tons of the dirty black stuff, but thanks to the suitably black arts of the marketing department, it’s portrayed as clean coal, because the output from the Powder River Basin has less sulphur than the stuff from the Appalachians.

While the old Santa Fe carries all sorts of things, the business only works commercially if coal remains the solution to America’s energy demands. It currently provides half of the country’s power needs, and the burn is forecast to rise steadily over the next five years.

To assuage the worries of the envuironmentalists, there’s plenty of talk of carbon capture, a sophisticated version of swallowing your own waste product. Unfortunately, nobody has made this technology work on a commercial scale, and even when someone can, one result will be to get less useful energy out of each ton, because of the high cost of capture.

from Rolfe Winkler:

Burlington…not so Buffett-like

So I thought I'd do a little number crunching on Buffett's Burlington deal. What does that tell us? That Buffett is paying a full price for a business with mediocre returns on capital, that he's betting on growth, not value.

Valuation (based on share prices of $100 for Burlington, $59 for Union Pacific, and $48 for Norfolk Southern):

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