Buffet is comparable to nobody else but Greenspan when it comes to making news on the slightest “ahem”, so a broad investment in three railroad stocks needs little introduction.

Today Berkshire Hathaway (BRK.A) is disclosing a $3.25 billion equity investment in Burlington Northern Santa Fe (BNI), and another $1b spread across two other U.S. railroad companies (of which there are only three candidates, CSX Corp (CSX), Norfolk Southern (NSC), and Union Pacific (UNP).

As expected, all four stocks are up sharply today, with the S&P 500 Rail Index up over 7% earlier this morning, and BNI itself up over 8.5% to just shy of $89/share. 

8.5% is about a standard “Buffet Bounce” for a first-time announcement, but this move will push Burlington Northern to a new all-time high, an area that is not normally associated with Buffet activity. 

But it’s not unheard of from Buffet to invest in a business at its relative peak; he did it with Coca-Cola (KO) in the 1980’s and American Express (AXP) more than once.  At the end of the day he trusts the long-term value of the business, and especially the moat, more than anything.  And you can’t beat the railroads when it comes to attractive moats.

This was the thesis behind our break-up value analysis of Burlington Northern, which postulates that there could be more upside from here.  Our analysis didn’t take into account some of the broad trends that could add to long-term estimates, specifically prospects of increased coal transports from Wyoming, and also is not meant to be a terminal value for the stock but rather an estimate of its floor. 

Buffet’s calculations must have come to similar conclusions to be purchasing BNI stock at its peak, but unfortunately we can’t peek over his shoulder on this one. 

Railroads are obviously very sensitive to the overall economy, but rising fuel prices should continue to favor the rail operators as their pricing becomes a lot more attractive when gas is on the rise. 

Ryan Barnes

April 9, 2007

Ryan Barnes can be reached at [email protected]; he does not own securities in the companies he covers.

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