When you think about climate-focused investments, it likely involves trendy talking points…
Wind… solar… water… geothermal… electric vehicles… you get the picture.
But the thing is, these popular ideas aren’t the only ways to help the climate.
Today, I’ll share one climate-focused investment you’ve probably never considered. But investing legend Warren Buffett is on board. And it’s worth keeping an eye on right now…
I’m talking about railroads. They’re friendlier to the climate than you might first think.
The Association of American Railroads (“AAR”) explains that “railroads account for 40% of U.S. freight but only 2.1% of U.S. transportation-related greenhouse gas emissions.”
If you’ve ever seen those endlessly long freight trains, that makes sense…
Imagine the traffic jams if those railcars were trucks. We already have enough trucks clogging up the roads and our windpipes.
In short, railroads help us reduce emissions because our goods aren’t moving around in dirty trucks.
And it’s already happening right now. We don’t have to suffer through years of big spending and political fighting in Washington, D.C., like we do with other climate-focused initiatives.
Better still, railroads help control fuel costs. Although the price of oil has come down from its recent Russia-Ukraine crisis peak, it’s still currently at about $100 per barrel.
AAR highlights the cost-control quality of railroads, too. It points out that “one train can carry the freight of hundreds of trucks.” And more specifically, the AAR notes that U.S. railroads, on average, move one ton of freight 470-plus miles on a single gallon of fuel.
Unlike many investors, Buffett already sees what we’re talking about…
His company, Berkshire Hathaway (BRK-B), invested heavily in a railroad back in 2010. He bought the rest of Burlington Northern Santa Fe (“BNSF”) for roughly $26 billion.
And in his most recent chairman’s letter, Buffett wrote, “If the many essential products BNSF carries were instead hauled by truck, America’s carbon emissions would soar.”
But you don’t have to be a do-gooder to like railroads. You see, there’s a secret behind Buffett’s climate investment…
After years of mergers, only five railroads are publicly traded today – Canadian National Railway (CNI), Canadian Pacific Railway (CP), CSX (CSX), Norfolk Southern (NSC), and Union Pacific (UNP). And they’re operating-margin monsters…
Operating margin is also known as return on sales. This metric is valuable because it’s closely tied to the day-to-day business operations.
It avoids accounting for items that flow from management’s strategic choices – such as debt service, asset sales, and tax planning. All of those items are part of net margins.
The median operating margin for the five publicly traded railroads over the past five years is 39%. And over the past 12 months, it’s 41%. For all the companies in the S&P 500 Index, the median operating margins over those periods are 17% and 18%, respectively.
Exceptional margins give railroads a larger cushion than the median S&P 500 company. They also help railroads tolerate oil-price woes better than truckers. The median operating margins of publicly traded companies in that group are only 7% over the same two periods.
Railroad stocks also earn superior returns on their assets. The median five-year average for the group is 10%. That’s much better than the 5.6% for the S&P 500 and 5.4% for truckers.
Right now, the Power Gauge is “neutral” or “neutral+” on all five publicly traded railroad stocks. So we don’t want to rush out and buy shares immediately.
Instead, keep an eye on them. Things change, after all. The pro-climate and fuel-efficiency angles might persuade more investors to start seeing why Buffett loves his railroad.
For now, all five railroad stocks deserve a place on your watch list.
Good investing,
Marc Gerstein
