BNSF Railway Company sym: BNI

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BNSF Railway Companysym BNI
Ramu Nachiappan Peter Fogarty 5/9/05

• Burlington Northern Santa Fe

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Company Profile

• 2nd Largest Railroad in the Country
• Based in Fort Worth Texas
• Reputed to have a strong Management Team with a
  focus on the long-term
• Owns 24,000 miles of track
• 8,000 miles of rights
• Product of the merger between
  Burlington Northern and Santa Fe in 1995

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Why railways?

• Rising Energy Prices means that trucking is less
  economically viable for long distance
  transportation
• Capacity tight in trucking industry because of
  consolidation
• Large demand, tight supply in railways
• Favorable pricing power
• High barrier to entry
• Low variable costs

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Macro Fundamentals

• Weaker dollar makes our industrial products and
  commodities more attractive
• Trade is now a larger share of our economy
• China, larger Asian Market
• Only 1/3 of products are economically sensitive
• Fuel Surcharges

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Why BNSF?

• Strong Management as viewed by analysts
• Has a on the Power River Basin one of the
  largest deposits of low-sulfur coal in the United
  States
• Located in faster growing regions of the country
• 3-4 volume growth on Western Railroads versus
  1 on Eastern ones
• Spent to improve infrastructure in the lean years
  will benefit them in the future
• Increased customer rates 6 - highest among North
  American railways

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Operations

• Management is praised for having a long term
  focus
• Expanding in the down years
• Restraining spending in good years
• 70 of freight revenue through contractual
  agreements
• Remainder through published prices

• Constantly improving network flow
• Maintaining a fluid network despite robust volume
  growth
• Maintenance
• 1.3 billion on maintenance
• 250 million on new locomotives and new track
• Logistical support - Supply Chain Consulting
  Services

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Volume Growth

• Double tracking entire transcontinental route
  from Southern California to Chicago near
  completion
• Allows for increased speed and volume
• May become more competitive with shipping through
  Panama Canal

• Partnerships with recently privatized Mexican
  railways may increase rail volume and
  competitiveness

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Growth Intermodal

• The use of multiple forms of transport such as
  trucking, shipping and rails
• Has links with all major ports along West Coast
  and across the Gulf Coast as well
• Has partnerships with many major trucking firms
  including Swift and JB Hunt through joint service
  agreements
• Stands to benefit from increased Asia-North
  America trade
• Low Exposure to automotive manufacturing

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Growth Coal Powder River Basin

• 21 revenues
• 90 is from the Powder River Basin Mines
• Low-sulfur deposits in greater demand with new
  regulations
• Rising demand from plants in the East and
  elsewhere
• Rising Oil and Natural Gas prices causing shift
  to coal
• Investigation into pricing or anti-trust issues

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Main Competition

• Union Pacific
• Lower operating margins
• Weaker market sentiment
• Staggering train delays (which make it difficult
  to raise prices)
• Losing market share to BNSF due to operational
  inefficiencies

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Ratio Analysis
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Financials
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Financials - Expenses
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Dividends Buybacks

• Dividend Yield Yearly Dividend/Stock Price
• Quarterly 17 cents
• Yearly 68 cents
• Dividend Yield 1.3
• Has steadily increased dividends over the past
  few years, indicating that this trend may
  continue
• Repurchased 10, 8 and 13 million of the companies
  shares in 04, 03 and 02 respectively.

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1 year Chart
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3 months Chart
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Risks

• Economic Slowdown
• Have large amount of long-term debt
• 420 million to service debt each year
• Union-Pacific may resolve some of their
  difficulties and become more competitive
• Risks Mitigated by
• Fuel is hedged through swaps so as to reduce
  risks
• Interest Rates are Hedged
• Risk to Reward Ratio is quite low

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Price Targets

• 52 Week high 56 dollars
• Our target is 57 dollars in 3-6 months
• Current Price 51.44
• Justification
• 60 target based on a 14 P/E multiple on 2006
  earnings

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Portfolio Considerations

• Helps stabilize portfolio
• Beta .499
• Relatively Low Risk Company
• Commodities an indirect play on commodities
  with lower risk
• Will do well in a market with rising energy
  prices
• Momentum may carry it forward