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WIKI ANALYSIS| This company has recently been acquired or received a credible acquisition offer. |
Burlington Northern Santa Fe (NYSE: BNI) is the second-largest U.S. railroad company with over 6,300 locomotives and 32,000 route miles. The company ships freight, such as coal and agricultural products, throughout the western two thirds of the United States.
In recent years, Burlington has benefited from rising demand for coal energy in the US. Increasing volumes of imports from China have also increased demand for BNI services. Most imports enter the U.S. through California and have to be shipped through out the U.S. by railroad companies like Burlington.
Business Overview
BNSF primarily serves the Midwestern, Western, and Southern regions and ports of the US. BNSF transports coal and a range of consumer, industrial, and agricultural products.
The following map shows BNSF's primary routes and trackage rights - which allow BNSF to access major cities and ports in the western and southern United States as well as Canadian and Mexican traffic. BNSF also serves many smaller markets by working with over 200 shortline (short regional transportation) partners. BNSF also has an agreement with CSX (CSX), Kansas City Southern (KSU), and Canadian National Railway Company which expands the marketing reach for all 4 companies and their customers.
- Coal Moving coal accounted for 20% of BNI's business in 2006. Burlington Northern makes a living bringing Montana/Wyoming Powder River Basin (PRB) coal east to a number of coal-fired utilities and industrial users. In 2006, PRB coal averaged $1.31/MMBtu delivered – easily the lowest priced American coal and substantially below natural gas delivered costs of $5.00/MMBtu or more. The Powder River Basin is a long-lived coal deposit that is the largest in the U.S. earning our country the moniker "the Saudi Arabia of coal." Coal revenues specifically account for 20% of BNI's sales. Last year, Burlington delivered over 55% of PRB coal. Burlington believes that the substantial long run cost advantage of PRB coal bodes well for the continued growth of its coal business. Likewise, much of BNI's coal business is based on legacy contracts that will see significant price adjustments upwards to current market rates. It is estimated that 60% of BNI's coal contracts will be renegotiated in the next 5 years to BNI's benefit.
- Consumer Products was 37% of freight revenues in 2006. Most of consumer product traffic was intermodal: domestic (transported from trucks) and international (transported from container ships). Intermodal is a term that applies to the transportation of freight in a closed container using multiple modes of transport (ocean, rail, truck) without any handling of the actual freight contained within when changing modes. Utilizing this method reduces cargo handling, improves security, reduces damages and loss, and allows freight to be transported more rapidly with less cost. The consumer products segment also includes the freight of automotive products such as assembled cars from Asia and domestically manufactured vehicle parts. [1]
- Industrial Products was 24% of freight revenues in 2006. It included building products (lumber, plywood, etc), construction products (clay, sand, cement, etc), petroleum products (liquefied petroleum gas (LPG), diesel, etc), chemicals and plastics (chlorine, industrial gases, plastics resins, etc) and food and beverage (canned goods, perishable food, etc). [2]
- Agricultural Products was 16% of freight revenues in 2006. It included wheat, corn, soybeans, barley, and other grains. BNSF's network is well positioned to serve the grain-producing regions of the Midwest and Great Plains. Agricultural products segment has experienced growth recently due to the tremendous interest in ethanol fuel, which is derived from corn. [3]
In 2006, revenues increased 15% to a record high of $14.5 billion. Consumer, Industrial, and Agricultural products revenue grew around 15%, while coal revenue grew 19%. Operating income surged 20% to over $3.5 billion. [5]
Trends and Forces
BNI Delivers Low Cost Coal
Demand for coal will play an important role in BNI's growth prospects, as coal accounts for 20% of its revenues. The company mostly transports coal from the Powder River Basin (PRB) of Montana/Wyoming to coal-fired utilities and industrial users. In 2006, PRB coal averaged $1.31/Million British Thermal Units (MMBtu) delivered – easily the lowest priced American coal and substantially below natural gas delivered costs of $5.00/MMBtu or more. Last year, Burlington delivered over 55% of PRB coal. Much of BNI’s coal business is based on legacy contracts that will see significant price adjustments upwards to current market rates. It is estimated that 60% of BNI’s coal contracts will be renegotiated in the next 5 years to BNI’s benefit.
Increased demand for Grains and Bio-Fuels
Agricultural products account for some 16% of BNSF revenues. Growing global food and ethanol demand has resulted in increased production of corn, soybean, wheat, and a whole host of other agricultural commodities. BNSF's rail network is well positioned to serve the grain-producing regions of the Midwest and Great Plains. This could boost this segment's freight revenue. For example, in nine months ended September 30, 2007, BNSF's revenues related to shipping ethanol increased 49%. [7]
Slumping Housing Market Weakens Demand for Industrial Transportation
Industrial products account for around a quarter of BNSF’s revenues. Within the industrial freight division, nearly 65% is related to construction and building products. With the weakness in new home construction across the country due to the subprime lending crisis, the industrial segment may see lower volumes. In Q3 2007, industrial products revenues declined due to lower freight of building and construction products, which was only offset due to continued strong demand for petroleum products. [8]
Impact of Fuel Prices on Railroads
Railroads can actually benefit from higher fuel prices because they are more efficient and environmentally friendlier than trucks in transporting various products. According to rival Union Pacific (UNP), railroad fuel efficiency has increased by 72% between 1980 and 2001. Railroads also gained efficiency by double-stacking railroad cars and implementing fuel surcharges in contracts. These improvements resulted in rails being 2x-4x more fuel efficient than trucks and 3x cleaner. At BNSF, 2007 fuel costs have been 24% of revenues through mid-year. A high oil price environment favors railroads over truckers as it is a smaller operating expense in terms of delivered cost.
The current high oil prices have also drawn great attention to the negative environmental impact of fossil fuels. Environment activist groups have put pressure on US companies to cut back on greenhouse gas emissions. Since railroads have significantly lower emissions compared to trucks, some companies may switch to railroads for their transportation needs.
Market Share
BNSF is the leading intermodal freight carrier in the US. A big part of their strength in this segment is their relationship with J.B. Hunt Transport Services (JBHT), a leading trucking company. These two companies have had a joint marketing agreement since 1989 and use each other's services to provide their customers with better on-time performance.
Competition
BNI's main competition comes from other railroads and the long-haul trucking industry. Union Pacific (UNP) is the primary railroad competitor. Many of their tracks run parallel and they service many of the same ports. UNP is the larger of the two companies and is the only railroad that services all six gateways to Mexico. However, BNI has better operational efficiency, as measured by it average operating ratio (operating expenses/operating revenue) - BNSF's average operating ratio over the past five years is about 4% lower than UNP's. In response, UNP created the Unified Plan in 2005-2006 to lower their operating ratio. It is designed to increase speed, efficiency, and improve asset utilization by changing their transportation system. The plan is new, but its impact could be noticeable over the next few years.
| Company | Revenue (in millions) | Net Income (in millions) | Miles of Track Owned | Number of Locomotives | Number of Freight Cars | Average Revenue per Car |
|---|---|---|---|---|---|---|
| Burlington Northern Santa Fe | $14,985[10] | $1,887[11] | 23,000[12] | 6,330[13] | 85,121[14] | $1,367 |
| Union Pacific (UNP) | $15,578[15] | $1,606[16] | 26,500[17] | 8,475[18] | 106,000[19] | $1,509[20] |
US Railroad Industry Peers
| ( All figures in $B) | BNI | KSU | CSX | NSC | UNP |
|---|---|---|---|---|---|
| Market Cap | 28.8 | 2.5 | 17.8 | 20.2 | 30.0 |
| Net Debt | 7.6 | 1.6 | 5.2 | 5.7 | 6.7 |
| Revenue | 15.3 | 1.7 | 9.8 | 9.3 | 15.8 |
| Operating Income | 3.4 | 0.3 | 2.1 | 2.5 | 3.1 |
| Net Inc | 1.8 | 0.1 | 1.2 | 1.5 | 1.7 |
| Net Debt/OI | 2.2 | 5.0 | 2.5 | 2.2 | 2.2 |
| Div Yield % | 1.6 | 0.0 | 1.5 | 2.0 | 1.2 |
Market caps range from $2.5 billion to $30 billion for the largest in the railroad industry, Union Pacific (UNP). In comparing companies, a few things stand out. Ignoring the substantially smaller Kansas City Southern (KSU), the big North American railroad sport around the same dividend yields and carry similar debt load multiples in terms of operating income.
References
- ↑ BNI 2006 10k, Pg. 9
- ↑ BNI 2006 10k, Pg. 10
- ↑ BNI 2006 10k, Pg. 11
- ↑ BNI 2006 10k, Pg. 20
- ↑ BNI 2006 10k, Pg. 18
- ↑ BNI 2006 10k, Pg. 16
- ↑ Citigroup Transportation Presentation - BNSF Management
- ↑ BNI 10Q 2007, Pg 28
- ↑ Association of American Railroads
- ↑ BNI 2006 10k, Pg. 16
- ↑ BNI 2006 10k, Pg. 16
- ↑ BNI 2006 10k, Pg. 6
- ↑ BNI 2006 10k, Pg. 6
- ↑ BNI 2006 10k, Pg. 20
- ↑ UNP 10K 2006, Pg 16
- ↑ UNP 10K 2006, Pg 16
- ↑ UNP 10K 2006, Pg 9
- ↑ UNP 10K 2006, Pg 10
- ↑ UNP 10K 2006, Pg 10
- ↑ UNP 10K 2006, Pg 20
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