BloggingStocks

Norfolk Southern: In the era of record oil prices, the railroads are roaring

Joseph Lazzaro — 2008-05-31T14:10:00+00:00

Filed under: Stocks to Buy, Norfolk Southern Corp. (NSC)

Readers of this space know that one of the preferred sectors is the railroad sector. The once near-rust-belt level sector has experienced a revival at the start of the globalization age, and compelling economic trends document the commerce-based underpinnings of this revival.

Most transportation officials agree that the U.S. transportation infrastructure -- highways, roads, bridges, mass transit systems -- is in need of a major upgrade in order to meet the nation's vehicle transportation needs of the 21st century.

The nation's public officials will begin to address the above concern in the years ahead, as public funds become available, but until they do, and due to crude oil's sustained high price, an opportunity has emerged for another transportation form: you guessed it, the railroads. And Norfolk Southern (NYSE: NSC) is a railroad worth an evaluation.

Norfolk Southern provides rail transportation in the eastern United States, operating a 21,000-mile rail network in the eastern United States and Canada. It's an elaborate intermodal and coal service network that also has a large freight business.

Analysts really like NSC's intermodal business, which accounts for more than 20% of revenue and will be the company's fastest-growing revenue stream, long-term. And the reason is obvious enough: burgeoning international trade requires that containers be moved, and rail offers a substantial cost savings over trucks.

In general, analysts see Norfolk's revenue growing 6% to 8% in 2008 with modest pricing power; margins should widen slightly. The Reuters F2008/F2009 EPS consensus estimates for NSC are $4.05/$4.62.

The risks? Continued sluggish conditions in the automotive sector would hurt NSC's results, as the rail company transports a considerable number of vehicles.

Still, so long as the global economy continues to grow at an adequate pace, Norfolk will maintain its decade-long momentum in the U.S.'s resurgent railroad sector.

The First Call mean rating for NSC is: Buy [13 firms]. Mean 2008 target: $66.00 [high: $74, low: $59].

Stock Analysis: Norfolk Southern is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than two years should be rewarded from NSC's shares. Sell / Stop Loss if you were to purchase shares in this company: $33.

Disclosure: Lazzaro has no positions in stocks. In addition to private real estate holdings, he owns corporate and municipal bonds, and cash certificates of deposit.

Permalink | Email this | Linking Blogs | Comments

Cramer on BloggingStocks: Oil's not the widespread tax it used to be

Jim Cramer — 2008-05-19T09:22:00+00:00

Filed under: General Electric (GE), Exxon Mobil (XOM), Market matters, Halliburton (HAL), Schlumberger Limited (SLB), Alcoa Inc (AA), Archer-Daniels-Midland (ADM), Bank of America (BAC), Boeing Co (BA), Chesapeake Energy (CHK), Chevron Corp (CVX), duPont(E.I.)deNemours (DD), Office Depot (ODP), Deere and Co (DE), Honeywell Intl (HON), United Technologies (UTX), Eaton Corp (ETN), Anadarko Petroleum (APC), Oil, Stocks to Buy, Burlington Northern Santa Fe (BNI), Norfolk Southern Corp. (NSC), Union Pacific Corporation (UNP), Cramer on BloggingStocks, Potash Corp. of Saskatchewan (POT)

TheStreet.com's Jim Cramer says lots of companies now thrive with crude up here.

Oil's not a tax on everything -- it's a tax on the consumer. That's what I come down to when I see the charts this weekend and ponder what's happening in so much of industrial America.

Company after company that I examine -- the new techs, as I call them -- actually benefit from higher oil prices. Or they can pass them on with ease, because of the worldwide demand being so strong.

Take all of the companies involved with making a Boeing (NYSE: BA) (Cramer's Take): Boeing itself, Alcoa (NYSE: AA) (Cramer's Take), Honeywell (NYSE: HON) (Cramer's Take) and Precision Castparts (NYSE: PCP) (Cramer's Take) being good examples. Each of these is necessary because the new Dreamliner burns lots less fuel, and with fuel the biggest airline cost, it stands to reason that higher energy prices make the plane more desirable even at a higher price point.

Or how about all of the companies involved with process and flow control and efficient motors: Parker-Hannifin (NYSE: PH) (Cramer's Take), Emerson (NYSE: EMR) (Cramer's Take), Eaton (NYSE: ETN) (Cramer's Take) and Flowserve (NYSE: FLS) (Cramer's Take). Those work higher with higher energy prices. CSX (NYSE: CSX) (Cramer's Take), Burlington Northern (NYSE: BNI) (Cramer's Take), Kansas City Southern (NYSE: KSU) (Cramer's Take), Union Pacific (NYSE: UNP) (Cramer's Take) and Norfolk Southern (NYSE: NSC) (Cramer's Take) are smaller energy users than trucks, and they ship plenty of ethanol and fertilizer.

Of course everything farming: Deere (NYSE: DE) (Cramer's Take), Monsanto (NYSE: MON) (Cramer's Take), Du Pont (NYSE: DD) (Cramer's Take), AGCO (NYSE: AG) (Cramer's Take), Potash (NYSE: POT) (Cramer's Take), Agrium (NYSE: AGU) (Cramer's Take), Mosaic (NYSE: MOS) (Cramer's Take) and Archer Daniels (NYSE: ADM) (Cramer's Take) (these are big companies in market cap now, powers of the S&P or companies just waiting to get into the S&P but stalled by a lack of mergers). And everything that drills, ships and transports oil and gas: Rowan (NYSE: RDC) (Cramer's Take), Parker (NYSE: PKD) (Cramer's Take), Weatherford (NYSE: WFT) (Cramer's Take), Cameron (NYSE: CAM) (Cramer's Take), Noble (NYSE: NE) (Cramer's Take), Transocean (NYSE: RIG) (Cramer's Take), FMC Tech (NYSE: FTI) (Cramer's Take), Oceaneering (NYSE: OII) (Cramer's Take) and so many others -- and of course, Halliburton (NYSE: HAL) (Cramer's Take) and Schlumberger (NYSE: SLB) (Cramer's Take).

And then there is oil and gas itself, ever a larger portion of the S&P. Look at the charts during last week's run: Apache (NYSE: APA) (Cramer's Take), Anadarko (NYSE: APC) (Cramer's Take), Nabors (NYSE: NBR) (Cramer's Take), Exxon (NYSE: XOM) (Cramer's Take), Chevron (NYSE: CVX) (Cramer's Take), Occidental (NYSE: OXY) (Cramer's Take), XTO (NYSE: XTO) (Cramer's Take), Southwestern (NYSE: SWN) (Cramer's Take), Chesapeake (NYSE: CHK) (Cramer's Take), Ultra (NYSE: UPL) (Cramer's Take): these all count.

Coal, of course, is a huge beneficiary. Infrastructure works because these companies get the benefits of the oil companies' largesse by being able to build energy-related production centers.

Even the autos can be viewed as benefitting, as the newer cars use less gas than the old ones, making them viable alternatives in multiyear paybacks. Along those lines, energy-efficient appliances get a boost.

Then there are the myriad energy-alternative plays that are always dominating the headlines but haven't yet made it into the S&P or are very small parts of the S&P: the wind plays -- Trinity (NYSE: TRN) (Cramer's Take), Woodward Governor (NASDAQ: WGOV) (Cramer's Take), Owens Corning (NYSE: OC) (Cramer's Take) (also insulation); solar -- First Solar (NASDAQ: FSLR) (Cramer's Take) ($24 billion market cap), SunPower (NASDAQ: SPWR) (Cramer's Take), and all the Chinese plays that people love so much.

Pipelines galore: Kinder Morgan (NYSE: KMP) (Cramer's Take), Enterprise (NYSE: EPD) (Cramer's Take), Boardwalk (NYSE: BWP) (Cramer's Take), so many others.

Many companies are neutral -- financial, telco, utilities -- although some benefit from the price umbrella of higher oil costs and can pass on costs they don't have. Tech's been fairly neutral. The weaknesses we have seen in tech are related to consumer slowdown (customers such as Office Depot (NYSE: ODP) (Cramer's Take)) or financial. Media's neutral, too. Health care can't be considered a negative either when it comes to energy consumption.

Most of the conglomerates say they are energy-positive: United Tech (NYSE: UTX) (Cramer's Take) and, famously, GE (NYSE: GE) (Cramer's Take), which has said that its fortunes should improve as oil goes higher, although we haven't seen that yet.

We know there are plenty that don't. Anything that is sold in the supermarket. Anything retail. Anything that uses oil or natural gas and can't really pass it on: Minerals and mining (although global demand really helps), glass (although recycling really helps, as in the case of Owens-Illinois (NYSE: OI) (Cramer's Take)), and chemicals and the paper producers.

But those companies aren't that important anymore, even though they dominate the consciousness of the marketplace, despite the encroachment of energy as a part of the S&P 500.

In fact, if finance could turn itself around -- something that seems increasingly possible, although it has sucked up a huge amount of capital and done nothing -- you could argue that we are on the cusp of a major move as it dawns on people that energy isn't the tax it used to be.

There are plenty of 30,000-foot flaws to this. We have seen time and again that our own growth in this country is heavily consumer-related. But the industrial growth owes itself not to the U.S. consumer, but the worldwide consumer.

All of these facts can go far toward explaining how higher oil prices have not been able to block the advance of the S&P or the Dow Jones averages. In fact, if the latter were more responsive to energy -- the Chevron nod was accompanied by ne'er-do-well Bank of America (NYSE: BAC) (Cramer's Take) instead of a Deere or another oil play like an Occidental or a Schlumberger -- we would be taking out 13,000 with ease.

All of this is worth thinking about when you are gloomy, because it doesn't add up to a decline, it explains the advance.

Keep it in mind during the next downturn. It explains a lot why they've been fairly shallow.

And I don't expect anything deeper now that finance seems to have stabilized.

RELATED LINKS:

Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer was long XTO and Owens-Illinois.

Permalink | Email this | Linking Blogs | Comments

As wider audience discovers U.S. railroads, perhaps you should, too

Joseph Lazzaro — 2008-04-21T17:44:00+00:00

Filed under: Stocks to Buy, Burlington Northern Santa Fe (BNI), Norfolk Southern Corp. (NSC), Union Pacific Corporation (UNP)

When a major, metropolitan U.S. newspaper discovers a investment trend or a hot sector, count on increased share demand for companies in the sector. When that paper is one of the top three dailies, in this case The Washington Post, count on even more demand.

On Monday, The Washington Post examined the resurgence of the United States' railroad sector, touching on many of the themes discussed here during the past six months, and described why the rails' services are likely to be in demand for many years.

Is it too late to get in on a rail play? Hardly. P/Es are higher, so entry point is key, hence with the above in mind, here's a revised review of the rails, with the updated Sell / Stop Loss levels. They're ranked by risk, with the top stock, BNI, being the lowest risk.

Burlington Northern (NYSE: BNI), first reviewed at $89, p/e 17. Stop Loss: $56. Current Price: $99, p/e 20. Revised Stop Loss: $72.

Union Pacific (NYSE: UNP), first reviewed at $129, p/e of 19. Stop Loss: $84. Current Price: $137, p/e 20. Revised Stop Loss: $97.

Norfolk Southern (NYSE: NSC), first reviewed at $52, p/e 14. Stop Loss: $33. Current Price: $61, p/e 17. Revised Stop Loss: $42.

CSX Corp. (NYSE: CSX), first reviewed at $42, p/e 16. Stop Loss: $27. Current Price: $60, p/e 20. Revised Stop Loss: $42.

Canadian Pacific (NYSE: CP), first reviewed at $66, p/e 14. Stop Loss: $44. Current Price: $71, p/e 12. Revised Stop Loss: $48.

Railroad stocks were out of favor on Wall Street for the longest time. After World War II, auto travel spelled the decline of civilian rail transport, and in the 1960s truck transport displaced trains as the primary freight transport method.

The rails were about set to fade into oblivion when history finally started to swing in the rails' favor. In the 1990s, the Cold War ended, and globalization started. Emerging markets became new buyers of commodities and raw materials, and railroads added new international customers. Meanwhile, the price of oil began its decade-long march higher in 2001, to the record level of $117 per barrel this year, making container transport by rail cheaper in most instances than truck transport. And suddenly, the rails had new domestic customers for finished goods, to go along with its commodity transport business.

The risks: This is not to say owning a railroad stock does not involved risks. The rails remain vulnerable to a sustained downturn in the U.S. and/or global economies, and also vulnerable to the development of a cheap, widely-available, alternate fuel source for trucks.

But absent the above, the prospects look good for the rails, long-term. Even better, urban highway congestion projections suggest that rails will play a large role in inter-city goods transport: it's hard for trucks to get goods to their destination quickly when the highways are jammed.

Or, as the late, great comedian Alan King used to say, "Why do they call it rush hour on the highways when nothing moves?"

Disclosure: Lazzaro has no positions in stocks. In addition to private real estate holdings, he owns corporate and municipal bonds, and cash certificates of deposit.

Permalink | Email this | Linking Blogs | Comments

CSX Corporation (CSX): Shares cycling in bullish 'flag' formation

Larry Schutts — 2008-03-20T11:50:00+00:00

Filed under: Analyst upgrades and downgrades, Good news, Technical Analysis, Stocks to Buy, Burlington Northern Santa Fe (BNI), Norfolk Southern Corp. (NSC), Union Pacific Corporation (UNP)

CSX Corporation (NYSE: CSX) is one of the nation's leading transportation companies, providing rail, intermodal and rail-to-truck transload services. The company's transportation network spans approximately 21,000 miles, with service to 23 eastern states and the District of Columbia. It connects to more than 70 ocean, river and lake ports. The company also has operations in real estate, resort management and equipment leasing. Burlington Northern (NYSE: BNI), Norfolk Southern (NYSE: NSC) and Union Pacific (NYSE: UNP) are competitors.

The firm pleased investors early this week, when it issued upside earnings guidance. Management now sees Q1 EPS of 70-73 cents, versus Street consensus of 63 cents. It also expects FY08 EPS of $3.36-$3.56, versus consensus of $3.05. The company boosted long-term guidance through 2010, anticipating compound annual growth in operating income of 13-15% over Y07 (10-12% prior guidance) and compound annual growth in EPS of 18-21% over Y08 (15-17% prior guidance). UBS subsequently upgraded the shares from "neutral" to "buy" and raised its price target to $66.

The stock popped into a bullish "flag" consolidation pattern on the news. Prices frequently exit flags moving in the same direction they were traveling on entry. In this case, that would be to the upside.

Brokers recommend the issue with three "strong buys", one "buy", nine "holds" and two "underperforms". Analysts see a 17% average annual growth rate, through the next five years. The CSX PEG ratio (1.19), Price to Cash Flow ratio (10.45), EPS Growth rate (49.12%), Operating Margin (22.49%) and Net Profit Margin (12.22%) compare favorably with industry, sector and S&P 500 averages. Institutional investors hold about 80% of the outstanding shares. The stock is one of those used to calculate the Dow Jones Composite and the Dow Transportation Index. Over the past 52 weeks, it has traded between $37.74 and $55.00. A stop-loss of $45.60 looks good here. Note that the firm is expected to announce Q1 results on April 16th, before the open.

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com. He does not hold positions in any of the stocks mentioned above.

Permalink | Email this | Linking Blogs | Comments

A tale of two railroads (NSC) (CNI)

Victoria Erhart — 2008-01-29T11:37:00+00:00

Filed under: Earnings reports, Industry, Competitive strategy, Norfolk Southern Corp. (NSC)

Railroad giant Norfolk Southern Corporation (NYSE: NSC) was up 10% in just the last week, based in large measure on super 4Q and FY2007 earnings released a week ago, January 22. Fourth quarter operating revenue increased 6% to $2.5 billion, and net income increased 4% to $399 million. What makes these numbers even more impressive is that Norfolk Southern posted revenue increases at the same time it faced significantly higher fuel costs and a measurable reduction in shipments by volume. Coal shipments dropped 2% by volume, while general merchandise shipments dropped a hefty 10% by volume.

The story is the same for FY2007 results. Revenue increased while shipments by volume decreased. And the railroad still made money. The stock closed at $45.07 on January 21, but closed at $52.00 on January 28. Very nice capital appreciation for a week. The company increased its dividend payout by 12% to $0.29 per share, a 32% increase over the last year, and the 102nd consecutive quarter of dividend payout. Clearly, Norfolk Southern is a stock for the very long haul.

Compare Noroflk Southern's results to those posted by Canadian National Railway (NYSE: CNI) on the same day. Faced with a similar drop in shipments by volume, CN suffered a 3% drop in revenue (pdf), adjusted EPS were flat, and half of the earnings reported derived not from operating profits but from favorable tax adjustments and the sale of assets.

CN got hit with a triple whammy in 4Q2007. Bad weather and a strike earlier in the year forced CN to play catch-up all year. The weak U.S. housing construction market meant far fewer lumber shipments from western Canada. A weak U.S. dollar relative to the Canadian dollar cost CN $25 million in U.S. denominated contracts, with no end in sight to both of these last two problems.

CN is trying to help itself. While the U.S. market cools, CN is investing in its Prince Rupert port facilities to handle much more intermodal traffic from Asia. The company forecasts FY2008 revenue growth at 6-8% with FY2008 EPS in the high single digits. Investors seem to believe the company's optimistic forecast. They have bid the stock up over 10% in the last week, from a 21 January close of $43.76 to a 28 January close at $49.08.

Permalink | Email this | Linking Blogs | Comments

Always lost at Monopoly? Re-coop with a railroad stock

Joseph Lazzaro — 2007-12-05T17:55:00+00:00

Filed under: Competitive strategy, Commodities, Agriculture, Burlington Northern Santa Fe (BNI), Norfolk Southern Corp. (NSC), Union Pacific Corporation (UNP)

Readers of this space know that the preference here is for large cap companies, with demonstrated business models, and favorable long-term factors, that have the resources to ride-out short-term economic downturns, including recessions.

And in this category a railroad stock represent a prudent addition to a portfolio, for investors who can tolerate moderate risk.

Pick a railroad. Virtually any railroad. Odds are, you will do fine, long-term, as the nation continues to re-discover the valuable asset - - the national treasury, really - - of its railroads. (More on that latter topic, in a future blog.)

Here are the railroad plays, ranked by risk, with the top stock, BNI, being the lowest risk. A stop/loss, if one were to buy the stock, is also listed:
Burlington Northern Santa Fe Corporation (NYSE: BNI) $89, p/e 17. Stop Loss: $56.
Union Pacific Corporation (NYSE: UNP) $129, p/e of 19. Stop Loss: $84.
Norfolk Southern Corp. (NYSE: NSC) $52, p/e 14. Stop Loss: $33.
CSX Corporation (NYSE: CSX) $42, p/e 16. Stop Loss: $27.
Canadian Pacific Railway Limited (NYSE: CP) $66, p/e 14. Stop Loss: $44.

As most investors/readers know, the railroad stocks were out of favor on Wall Street for the longest time. After world war II, auto travel spelled the decline of civilian rail transport, and truck transport displaced trains as the primary freight transport method.

The rails were seemingly about set to fade into oblivion when history finally started to swing in the rails' favor late in the last century. In the 1990s, the Cold War ended, and globalization started. Emerging markets became new buyers of commodities and raw materials, and railroads added new international customers. Meanwhile, the price oil began its decade-long march higher, to near-record levels this year, making container transport by rail cheaper in most instances than truck transport. And suddenly, the rails had new domestic customers for finished goods, to go along with its commodity transport business.

The risks: This is not to say owning a railroad stock does not have risks. The rails remain vulnerable to a sustained downturn in the U.S. and/or global economies, and also vulnerable to the development of a cheap, widely-available, alternate fuel source for trucks.

But absent the above, the prospects look good for the rails long-term. Even better, urban highway congestion projections suggests that the rails will play a large role in inter-city goods transport: It's hard for trucks to get goods to their destination quickly when the highways are jammed.

Permalink | Email this | Linking Blogs | Comments

In eastern U.S., Norfolk helps keep everything in motion

Joseph Lazzaro — 2007-11-30T17:53:00+00:00

Filed under: Commodities, Stocks to Buy, Norfolk Southern Corp. (NSC)

Most transportation officials agree that the United States' transportation infrastructure - - highways, roads, bridges, mass transit systems - - is in need of a major upgrade in order to meet the nation's transportation needs of the 21st century.

The nation's public officials will begin to address the above concern in the years ahead, as public funds become available, but until they do, and due to crude oil's sustained high price, an opportunity has emerged for another transportation form: you guessed it, the railroads. And Norfolk Southern Corp. (NYSE: NSC) is a railroad worth a review.

Norfolk Southern provides rail transportation in the eastern U.S. and Canada, operating a 21,000-mile rail network. It's an elaborate intermodal and coal service network that also has a large freight business.
Analysts really like NSC's intermodal business, which accounts for 21% of revenue and will be the company's fastest-growing revenue stream, long-term. And the reason is obvious enough: burgeoning international trade requires that containers be moved and rail offers a substantial cost savings over trucks.

In general, analysts see Norfolk's revenue growing 6%-8% in 2008 with modest pricing power; margins should widen slightly. The Reuters F2007/F2008 EPS consensus estimates for NSC are $3.64/$4.05.

The risks? Continued sluggish conditions in the automotive sector will hurt NSC's results, as the railroad transports a large amount of vehicles.

Still, provided the U.S. economy performs reasonably well, Norfolk will maintain its near-decade-long momentum as part of the U.S.'s resurgent railroad sector. Given the nation's congested highways and current high oil prices, the rails offer a great way to move goods around.

The First Call mean rating for NSC is: Buy. [16 firms.] Mean 2008 target: $60.50. [high: $65, low: $53.]

Stock Analysis: Norfolk Southern is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than 1 year should be rewarded from NSC's shares. Sell / Stop Loss if you were to purchase shares in this company: $33.

Permalink | Email this | Linking Blogs | Comments

Analyst upgrades: PCOP, ZUMZ, NSC and OCCX

Eric Buscemi — 2007-10-11T11:00:00+00:00

Filed under: Analyst reports, Analyst upgrades and downgrades, Norfolk Southern Corp. (NSC)

MOST NOTEWORTHY: Pharmacopeia, Zumiez, Norfolk Southern and OccuLogix were today's noteworthy upgrades:

CIBC upgraded Pharmacopeia (NASDAQ: PCOP) to Sector Outperformer from Sector Performer, as they believe its lead cardiovascular drug DARA has the potential to become an important new therapy for hypertension and diabetic nephropathy.
Think Equity upgraded shares of Zumiez (NASDAQ: ZUMZ) to Buy from Accumulate to reflect the company's strong same store sales growth.
Norfolk Southern Corporation (NYSE: NSC) was upgraded to Equal Weight from Underweight at Lehman Brothers on valuation.
Caris upgraded shares of OccuLogix (NASDAQ: OCCX) to Above Average from Average, as they believe weakness in the stock creates a buying opportunity. The firm believes the stock has dropped due to concerns about the company's cash position, but thinks the current stock price underestimates the revenue potential of the company's assets.

OTHER UPGRADES:

BRE Properties (NYSE: BRE) was upgraded to Outperform from Neutral at Credit Suisse.
Bear Stearns raised Capital Product Partners (NASDAQ: CPLP) to Outperform from Peer Perform.
JP Morgan upgraded Celestica (NYSE: CLS) to Neutral from Underweight.
Stifel upgraded SL Green Realty (NYSE: SLG) to Buy from Hold.

Permalink | Email this | Linking Blogs | Comments

Serious Money: The page on Buffett IV: Durable Competitve Advantage

Sheldon Liber — 2007-09-12T13:48:00+00:00

Filed under: Competitive strategy, Berkshire Hathaway (BRK.A), Huaneng Power Intl ADS (HNP), Serious Money, Intuitive Surgical Inc (ISRG), Burlington Northern Santa Fe (BNI), Norfolk Southern Corp. (NSC), Union Pacific Corporation (UNP)

Given investors anxiousness about the economy and hearing more gloom and doom than I think is warranted, I thought I would get back to basics with "my pal" Warren, and add to the series I started several months ago. I decided to write the series after receiving encouragement from friends and associates that read With Warren Buffett by my side ....

Today, I am writing about the concept of Durable Competitive Advantage, which is the ability to get ahead and stay ahead with a high level of certainty. It is also referred to as Sustainable Competitive Advantage.

To achieve a Durable Competitive Advantage, several factors have to be present. One is a big moat (Buffett expression) surrounding the enterprise. This usually means businesses that sell commodities where price is the primary factor in determining opportunity, have no moat as price takers. Their profit margins are not easily defendable. Another factor is barrier to entry. How easy would it be for someone to enter the same business and compete? The T-shirt business is a good example, of something without a Durable Competitive Advantage. Anyone could enter this business in one day, and they do. So unless the business has some unique concept, it does not have the promise of relatively predictable and sustainable profit margins in the future.

I have written about many companies that I think meet this criteria and if you follow my stories you have already read Volatile Markets: Huaneng Power (HNP) is my pick for the next 50 years and Intuitive Surgical jumps over 32% - where's the ceiling? I hope you can forgive my redundancy in bringing them up so often but HNP is the largest Utility in China, and Intuitive Surgical (NASDAQ: ISRG) is the world leader (and only player) in robotic surgical equipment. Both have huge Durable Competitive Advantages; they are both practically monopolies, and it would take almost insurmountable amounts of capital resources, time, political and intellectual might to try and compete.

Buffett, through Berkshire Hathaway (NYSE: BRK.A) has followed this pattern for decades and in recent years had been buying up utilities and more recently, railroads. BRK has become the largest shareholder of the Burlington Northern Railroad (NYSE: BNI) and has acquired shares of the Norfolk Southern (NYSE: NSC) Union Pacific (NYSE: UNP). Can anyone really imagine starting a new railroad? In your wildest dreams you could not conceive of buying thousands of miles of land and right-a-ways in less than decades. The capital costs would make it impossible for anyone except the government and even with the right of eminent domain this is a non-starter. Mr. Buffett has still got it. And if you want to get it too, then remember his lessons.

The following are the previous stories in the series.

Disclosure: I own shares in BRK.B, HNP and ISRG as of today's date. The railroads are all on my watch list.

To find more potential opportunities and verify my track record read Chasing Value or Serious Money.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He is on the advisory board of internet start-up CircleBuilder.com.

[photo w.marsh]

Permalink | Email this | Linking Blogs | Comments