Warren Buffett Really Likes Railroads; Should You?

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I should also point out that rail transport companies offer less expensive shipping solutions for companies shipping goods in bulk than their trucking counterparts. Trucks are extremely inefficient relative to trains. First, trucks are less fuel efficient relative to trains. In a world in which fuel prices are rising, this favors rail transport companies. Second, trucks require one driver each, whereas a train is akin to hundreds of trucks linked together. This means that train operators save money on labor. This is a big deal considering that labor costs go beyond simply paying employees. Employers also have to file paperwork with the government and pay payroll taxes.

Given these two points, it is no wonder that the rail transport business has performed so well over the past several years. These companies have consistently grown their sales and their earnings over the years. They also have very strong profit margins.

I should also point out that the rail transport companies are, for the most part, very shareholder friendly. They buy back their own shares on a regular basis, and yet they have a history of doing so prudently. Norfolk Southern is a good example. The company struggled in 2012 with lower coal shipments, and as a result the market sold off the company’s stock. The company responded by buying back shares more aggressively. The stock now trades at nearly twice the price of the low and earnings are back up again.

Clearly there is a lot to like about this industry. One risk to the rail transport stocks is the potential for a weak economy. Since businesses ship fewer goods during a recession, rail transport companies’ earnings suffer as well. Nevertheless there is a small chance that these companies will suffer losses.

Investors looking to invest in the rail transport industry should consider waiting for a pullback. Most of these stocks are trading at or near all-time highs. However, if you see a 10 percent correction or so in any of the names mentioned, I think you need to consider buying some shares for the long term.

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