Tuesday, 10 November 2009

Macro Level Trends – US Transportation – Berkshire Hathaway's “Burlington Berties”

Though investment-auto-motives obviously focuses directly upon the car industry and its players, an overtly narrow and blinkered view must be avoided given the inter-sector connectedness of companies such as Daimler, FIAT, TATA etc, the cross-fertilisation of technology and of course the major macro PESTEL trends and accordant sector schisms that highlight investment opportunities.

Such opportunities come either within a sector as a result of conventional dynamics or, as importantly, promote opportunity within an alternative sector as a consequence or by-product.

Such – investment-auto-motives believes – adds to the weight of Berkshire Hathaway's full purchase of BNSF (nee Burlington Northern Santa Fe), at $100 per share (approx $44bn).BH already had substantial interest in the second largest freight-railroad company in the USA, and appreciates the convention of a slow but stable yield through dividends and MktCap growth; the rational core of a 'utilities' orientated enterprise.

However, Buffet and Munger also recognised that an opportunity was arising as a result of the perfect storm appearing over the horizon for trucking sector.

The harsh US recession has sharply curtailed road-freight shipping, the obvious consequence of now misaligned supply and demand curves generating a substantial slack in the trucking system that has driven down prices as competition became fierce and as a consequence has forced the one-man 'owner-operator' truckers and small-scale 'independent' firms to either exit or consolidate.

Moreover, the combination of essentially frozen credit markets frozen to small business and SME's and the 2010 legal requirement (as of 01.01.2010) for the sale of only new emissions compliant semi-trailer tractor units (as part of the US's efforts to cut CO2), means that large chunks of the trucking sector's capacity will effectively disappear.

Taking Class 7 as a sector median, new truck sales peaked at 131,000 units in 1999, with the 2008 low of 49,000 (see pictorial graph). Daimler highlighted the ongoing situational drag in its Q309 results presentation reletive to its Class 8-10 tractor units which have performed worse than even Class-7 trucks, portending the 'pull-forward' 2010 North American truck sales into 2009, so undermining 2010/11 production and therefor by virtue US and Canadian 2010/11/12 shipping capacity.

This then leaves a short-fall in cross-country shipping capacity when the economic recovery begins proper. And given the scale of the down-turn – economic data-sets urging financial analogies to the Great Depression & WW2 – it is no surprise that the BH duo see today's present circumstances as a re-run of their formative experiences in the 1950s.

Hence, whilst these new “Burlington Berties” like to convey the conventional, conservative 'slow and steady' typical nature of rail-road investment to the outside world and BH's own mom & pop and institutional stock-holders who themselves garner risk-aversity, the sector's own metaphorical 'train' that has had to date grind uphill against the pricing pressures of trucking and other rail sector competitors nears the headwind summit.

The other side a theoretical case of a much improved downhill progress assisted with tailwinds such as declined competition, infrastructure grants from the US and Federal governments, greater pricing power and over the next decade (and possibly beyond) much improved 'sustainable' margins.

Furthermore, BNSF has tried encourage 'railfans' to effectively patrol portions of its track. This appears to be part of psychological shift for the younger demographic toward rail relative to an expected reduction in car reliance – the 17m TIV unit production of 2007 seen as a historical peak – so promoting rail as a form of near-point intra-regional leisure travel with overtones of yesteryear glamour via streamlined stainless-steel Burlington Zephyr locomotives pulling upmarket carriages and observation cars with on-board entertainment.

Such a possible initiative could be related to an important broader contextual agenda.

investment-auto-motives also believes that US industry could well undertake a greatly increased level of commercially-led philosophical & practical integration – something akin to spectrum of interactivity - from 'arms-length' collaboration to direct M&A. That could see Berkshire Hathaway and similar other large PE holding companies act as a powerful 'rationalising forces' that encourage sector cross-fertilisation, innovation, efficiency-seeking and new business models to enhance concomitant ROI.

Moreover, given the increasing level of corporate social responsibility relative to 'under-the-umbrella' workforces, unemployment and housing dilemmas, there could feasibly be a return of 'Guardian Corporations' which through a modern equivalent to yesteryear 'garden-factories' and company-build villages actually house and possibly educate. Such efforts also have the benefit of reducing inherent labour costs and offer holding companies the ability to buy real-estate and acreage and build at below par values, to latterly sell-off the housing stock as the economic shape of the country itself re-evolves over time.

Hence, figures such as Buffett, Munger, those with honourable reputations on Wall Street and Industrialists like BNSF's & GM's Whitacre acting as enabling 'Generals'.

The 'Burlington' name itself was re-appropriated across various areas of the USA in the mid 19th century, and of course originates from the historic links to Britain; specifically the fashionable commercial ('Society') 'Arcade' built beside the Lord of Devonshire's home Burlington House in London's Piccadilly. The house itself became home to the Royal Academy, itself a philosophical cornerstone for the Arts and Science that underpinned Britain's own industrial revolution.

Hopefully Berkshire Hathaway's own paradoxical 'Burlington Berties' – given their modesty, humbleness & bee-like activity - have such similar grand ambitions for a much needed 21st century US industrial revolution.

Post Script...
[NB. Belief in the forthcoming strength and resultant reward of rail-freight container transport on the back of continued strong economic growth has been the raison d'etre for Blackstone GPV Capital Partners to buy 37.5% of Gateway Rail Freight Ltd in India].