Berkshire's Railroad on a Prosperous Path Q3 2024

Discover how BNSF, a vital asset in Berkshire Hathaway's portfolio. BNSF's has shown a robust performance in Q3 2024 after a mixed performed during the first half of 2024 ↗↗. Find out about strategic innovations and possible room for growth based on recent policy changes by the Biden-Harris administration.

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Introduction

Berkshire Hathaway's storied history is marked by strategic foresight and astute investments, none more emblematic than the acquisition of BNSF Railroad in 2010. This move, orchestrated by Warren Buffett, underscored a visionary commitment to investing in America's rail infrastructure, a cornerstone of the nation's economic engine. As a pivotal component of Berkshire Hathaway's portfolio, BNSF stands as a testament to the enduring value of railroads in the broader economic landscape of the United States.

The Q3 2024 results of BNSF Railway are a beacon of resilience amidst recent economic trends and challenges ↗. They offer a window into the company's robust performance and strategic initiatives, setting the stage for a deeper exploration of its future outlook. Railroads have historically been the lifeblood of American economic development, and BNSF's continued success draws a parallel to modern-day infrastructure investments that are vital for sustained growth.

This article aims to provide shareholders with a comprehensive understanding of BNSF's current standing and future prospects. By weaving together historical, political, and economic insights, we offer a richer narrative that underscores the significance of BNSF's operations. As we delve into BNSF's performance, strategic initiatives, and the broader economic context, we invite you to explore the intricate tapestry of factors that contribute to its ongoing prosperity.

BNSF's Operational Footprint

BNSF Railway's expansive network is a testament to its strategic importance in North America's transportation landscape. Operating over 32,500 route miles across 28 states and three Canadian provinces, BNSF's reach is unparalleled ¹. This vast geographical footprint is crucial in connecting key economic regions, facilitating trade, and supporting the U.S. supply chain, particularly during peak seasons ³. Yes, Berkshire Hathaway shareholders can be very proud of their railroad!

The strategic importance of BNSF's network cannot be overstated. It serves as a vital artery for commerce, supporting diverse industries ranging from agriculture to consumer goods. BNSF's partnerships with key stakeholders, including American grain producers and major corporations like Tyson Foods, further underscore its role as a linchpin in the nation's economic infrastructure ³⁴. As Angela Caddell, Group Vice President of Agricultural and Energy Products, noted, BNSF is committed to supporting the American farmer and the country's supply chain during peak harvest seasons ³.

Historically, BNSF's network has evolved to meet modern logistical demands, adapting to the changing needs of industries and consumers alike. This evolution is not just a reflection of technological advancements but also of strategic foresight in positioning BNSF as a leader in the rail industry. By continuously enhancing its network capabilities, BNSF ensures that it remains at the forefront of facilitating efficient and reliable transportation across North America. Thus, BNSF's operational footprint is a cornerstone of its success, enabling it to support a wide array of industries and maintain its position as a critical player in the U.S. supply chain. As we move forward, BNSF's ability to adapt and innovate will be key to sustaining its strategic advantage in the ever-evolving landscape of rail transportation.

But how did this giant of American industry perform in the third quarter of 2024? After all, even the most important business needs to be profitable!

Financial Performance in Q3 2024

BNSF Railway has demonstrated a robust financial performance in the third quarter of 2024, marked by a 2.8% increase in railroad operating revenues ¹. This growth is primarily attributed to an 8.3% increase in car/unit volumes, reflecting BNSF's ability to capitalize on heightened demand and improved operational productivity ¹. Despite a 5.2% decline in average revenue per car/unit, BNSF's strategic focus on volume growth and cost management has led to a 14.8% rise in pre-tax earnings for the quarter ¹.

The company's financial success is underpinned by its commitment to operational efficiencies and cost management. Notably, BNSF achieved a $82 million reduction in railroad operating expenses, driven by lower fuel costs and decreased equipment rents ¹. However, the quarter was not without challenges, as increased litigation accruals posed a financial burden (see our coverage of the Swinomish trial here: ↗). BNSF is actively addressing these issues, ensuring that they do not impede future growth.

In comparison to industry trends, BNSF's performance aligns with broader economic indicators. The Freight Rail Index (FRI) revealed a 3.5% year-over-year increase, indicating a positive trajectory for the rail industry despite ongoing challenges in manufacturing ⁷. The company's ability to navigate these complexities and leverage consumer demand highlights is vital for Berkshire Hathaway.

Here is a summary of key financial metrics for Q3 2024 ¹ - amounts in million dollars:

	Third Quarter 2024	Third Quarter 2023	First Nine Months 2024	First Nine Months 2023
Railroad operating revenues	$5,881	$5,719	$17,242	$17,311
Railroad operating expenses
- Compensation and benefits	$1,404	$1,392	$4,129	$4,083
- Fuel	$799	$863	$2,475	$2,660
- Purchased services	$501	$503	$1,487	$1,503
- Depreciation and amortization	$647	$655	$1,972	$1,950
- Equipment rents, materials and other	$477	$497	$1,583	$1,686
Total	$3,828	$3,910	$11,646	$11,882
Railroad operating earnings	$2,053	$1,809	$5,596	$5,485
Interest expense	($275)	($269)	($807)	($782)
Other revenues (expenses), net	$68	$60	$198	$169
Pre-tax earnings	$1,846	$1,608	$4,987	$4,872
Income taxes	$463	$387	$1,234	$1,140
Net earnings	$1,383 🚂	$1,221	$3,753	$3,732

As you can see, BNSF reported net earnings of about $1.4 billion in the third quarter of 2024, which represents a 13% increase compared to $1.2 billion in the third quarter of 2023. For the first nine months of 2024, net earnings totaled $3.753 billion, showing a minor increase from $3.732 billion in the same period of 2023. The improvement in quarterly earnings reflects stronger operating performance, despite marginal changes in year-to-date results. Hence, BNSF operations are looking steady and we might end up in net earnings around $5 billion for 2024. Not bad!

Sector-Specific Insights

BNSF's performance across various sectors in Q3 2024 showcases a diverse portfolio and adaptability to market dynamics. The consumer products sector emerged as a strong performer, with operating revenues reaching $2.1 billion, a 7.0% increase from the previous year ¹. This growth is fueled by robust consumer demand and heightened intermodal rail traffic, as consumers continue to drive the market despite manufacturing struggles ⁷.

Conversely, the industrial products sector faced challenges, with a 1.6% decline in operating revenues and a 1.9% decrease in volumes ¹. This downturn is reflective of broader economic trends, including a manufacturing slump and energy transitions impacting demand for traditional industrial commodities ⁷.

In stark contrast, BNSF reported record agricultural volumes, with a 14.9% increase in Q3 ¹. This achievement underscores the company's strategic alignment with the agricultural sector, further bolstered by its historical partnership with American grain producers ³. The agricultural sector's performance is pivotal for BNSF's growth strategy, as it continues to support the American farmer and the supply chain during peak harvest seasons.

The coal sector, historically significant for railroads, is experiencing a decline with a 14.7% drop in revenues and a 12.5% decrease in volumes ¹. This trend aligns with the ongoing shift towards more sustainable energy sources, prompting BNSF to adapt its services to meet changing market demands. A notable initiative is the launch of a new express carload service from the Pacific Northwest to Colorado and Utah, which enhances market access and transit efficiency ⁵.

Below is an enumeration of sector-specific revenue and volume changes for Q3 2024:

• Consumer Products: Revenue +7.0%, Volume +16.7%
• Industrial Products: Revenue -1.6%, Volume -1.9%
• Agricultural Products: Revenue +14.1%, Volume +14.9%
• Coal: Revenue -14.7%, Volume -12.5%

Through strategic initiatives and a focus on innovation, BNSF is well-positioned to navigate the evolving landscape and capitalize on emerging opportunities across its diverse sectors.

Strategic Initiatives and Innovations

BNSF Railway is charting a course for future growth and efficiency through a series of strategic initiatives and innovations that are set to redefine its operations. A key highlight is the launch of a new express carload service from the Pacific Northwest to Denver and Salt Lake City, which commenced on September 30, 2024. This service is a testament to BNSF's commitment to enhancing transit times and expanding market access. By cutting transit time in half compared to traditional rail services, BNSF is offering a competitive alternative to over-the-road options, thereby opening new avenues for growth in the burgeoning markets of Colorado and Utah ⁵.

Infrastructure improvements, such as the Sandpoint Junction Connector rail bridge, completed in late 2022, have been pivotal in enhancing operational efficiency. This crucial development allows for two-way traffic, thereby optimizing BNSF's network. Such advancements not only bolster BNSF's service offerings but also underscore its dedication to maintaining a robust and reliable rail network.

BNSF's possible involvement in the Biden-Harris Administration's rail improvement projects further illustrates its strategic foresight. With over $2.4 billion allocated for rail projects aimed at improving safety, reliability, and resilience, BNSF stands to benefit significantly from these investments. These projects are expected to lower shipping costs, reduce pollution, and enhance the overall efficiency of the rail network, aligning with BNSF's goals of sustainability and innovation ⁶.

Labor agreements are another cornerstone of BNSF's strategic framework. The recent ratification of a five-year collective bargaining agreement with the International Brotherhood of Boilermakers (IBB) is a significant step toward ensuring workforce stability. This agreement, which includes a 3.5% average wage increase per year and improved vacation and healthcare benefits, covers approximately 17% of BNSF's union workforce. Such agreements are crucial for maintaining a motivated and satisfied workforce, which is essential for operational success ².

BNSF's collaborations with key partners, such as Tyson Foods, further emphasize its commitment to service quality and customer satisfaction. Being named Carrier of the Year by Tyson Foods is a testament to BNSF's dedication to understanding and prioritizing customer needs, fostering a collaborative relationship that enhances both companies' growth and service capabilities ⁴.

Throughout its history, BNSF has been at the forefront of rail innovations, continually adapting to the evolving logistics landscape. This legacy of innovation is evident in its current initiatives, which are not only geared toward immediate operational enhancements but also lay the groundwork for long-term growth and sustainability.

Economic and Political Context

The economic and political landscape plays a crucial role in shaping BNSF's operational strategies and performance. In the current economic context, consumer spending trends and inflation rates are pivotal factors. Despite ongoing manufacturing struggles, strong consumer spending has driven intermodal demand, with a 5.5% year-over-year increase in intermodal rail traffic in October 2024. This surge is fueled by heightened demand for consumer goods and imports, particularly through West Coast ports ⁷.

Recent Federal Reserve rate cuts in September and October have sparked optimism for rail demand in 2025. These cuts are expected to boost economic activity, providing a favorable environment for the freight rail industry to rebound after a prolonged downturn. The potential for increased demand for rail-transported commodities like metals, chemicals, and lumber bodes well for BNSF's future prospects ⁷.

On the political front, the Biden-Harris Administration's infrastructure investments are poised to have a significant impact on BNSF. The administration's commitment to building a stronger, safer, and more resilient transportation network aligns with BNSF's goals. The $2.4 billion investment in rail projects, administered through the Federal Railroad Administration's CRISI Program, represents the most significant funding for American rail in over 50 years. These projects not only enhance rail safety and reliability but also support the rail workforce through new apprenticeship programs and training opportunities ⁶.

However, challenges persist, particularly the ongoing manufacturing slump, which has dampened carload volumes for key industrial commodities. October 2024 marked the seventh consecutive month of contraction in manufacturing, impacting rail traffic volumes. Despite these challenges, railroads remain strategically important in national policy discussions on transportation and infrastructure, underscoring their role in America's economic growth ⁷.

Conclusion

In Q3 2024, BNSF Railway has once again demonstrated its strategic importance to Berkshire Hathaway, showcasing a robust operational performance and a commitment to innovation amidst a challenging economic landscape. With a 2.8% increase in railroad operating revenues and a remarkable 14.8% rise in pre-tax earnings, BNSF has effectively navigated the complexities of the current market, emphasizing its resilience and adaptability. The company's ability to increase car/unit volumes by 8.3%, despite a decline in average revenue per car/unit, highlights its focus on volume growth and cost management, crucial elements for maintaining profitability in a competitive environment. For 2024, BNSF might be heading towards $5 billion in net earnings.

Historically, railroads have been the backbone of American economic development, and BNSF continues to embody this legacy. The company's expansive network, which spans over 32,500 route miles, not only facilitates the movement of goods across the nation but also supports various sectors, from agriculture to consumer products. The record agricultural volumes reported in Q3 further underscore BNSF's vital role in the supply chain, particularly during peak harvest seasons. This adaptability to market demands is a testament to BNSF's strategic foresight and operational excellence.

Looking ahead, the positive outlook for BNSF is bolstered by several factors, including ongoing strategic initiatives such as the launch of new services and infrastructure improvements, as well as supportive economic conditions driven by recent Federal Reserve rate cuts. These developments, coupled with the Biden-Harris Administration's significant investments in rail infrastructure, position BNSF to capitalize on emerging opportunities and navigate potential challenges effectively. The alignment of BNSF's goals with national policy initiatives further enhances its prospects for sustained growth.

For Berkshire Hathaway shareholders, BNSF represents a stable and strategic asset within the portfolio. The company's historical resilience, combined with its commitment to innovation and operational efficiency, reinforces its value as a cornerstone of Berkshire Hathaway's investment strategy. As we consider the broader economic and political context, it is clear that continued investment in infrastructure and innovation will be paramount for BNSF's long-term success.

In conclusion, BNSF Railway is poised to continue driving growth and value creation for Berkshire Hathaway. By leveraging its extensive network, embracing strategic initiatives, and adapting to evolving market dynamics, BNSF is not only a testament to the enduring relevance of railroads in modern logistics and transportation but also a beacon of opportunity for shareholders looking toward a prosperous future.

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