Berkshire Hathaway CEO Warren Buffett seemed to shoot down reports that his firm's BNSF Railway unit has hired Goldman Sachs to explore forming a coast-to-coast railroad, following news that Union Pacific is in talks to acquire Norfolk Southern. Analysts have speculated that BNSF might make a bid for CSX to capitalize on the more liberal antitrust climate under President Trump.
Buffett told CNBC on Tuesday that neither he nor Greg Abel, who will run Berkshire Hathaway when the legendary 94-year-old investor steps down at year-end, have spoken to Goldman. Buffett didn't address whether his company will pursue an intercontinental railroad network, only saying Berkshire Hathaway wouldn't bring in outside bankers on deals.
S&P 500 railroad stocks CSX, NSC and UNP all climbed in early Tuesday stock market action. Both Reuters and news platform Semafor reported that BNSF hired Goldman to explore buying one of the two major East Coast railroad networks, CSX and Norfolk Southern. Union Pacific and BNSF operate railroad networks in the western two-thirds of the U.S.
Railroad Merger Math: 1 + 1 = 3
In a Monday research note, Bernstein raised its price target for UNP to 286 from 271, keeping a buy rating. UNP tumbled 4.35% last week, selling off as investors braced for a possible deal. "Buyers' stocks go down and target stocks go up," Bernstein analyst David Vernon wrote, according The Fly investment news site.
But Vernon said this deal is atypical, since a coast-to-coast network would unlock significant value for both parties that can only be unlocked via a merger.
Meanwhile, TD Cowen upgraded CSX to buy from hold on Monday, boosting its price target to 45 from 32. A Union Pacific bid for Norfolk Southern could raise the floor for CSX, the research firm said, adding that a UNP-CSX deal couldn't be ruled out.
TD Cowen analyst Jason Seidl wrote, "A UNP bid for Norfolk Southern likely results in a BN bid for CSX," according to the Jacksonville Daily Record. Seidl added that CSX might fetch a smaller premium than NSC, "given they would be the later draft pick."
Union Pacific CEO James Vena, speaking at a Wells Fargo investor conference on June 10, said a transcontinental railroad merger "would be fantastic for our customers, fantastic for competition, fantastic politically."
A transcontinental railroad line is seen as more viable under President Donald Trump's antitrust policies. Trump-appointed Surface Transportation Board Chairman Patrick Fuchs has expressed openness to railroad consolidation.
Semafor has noted that a coast-to-coast railroad line would provide stiffer competition for the trucking industry, which handles 70% of domestic freight.
Opportunity For Berkshire Hathaway?
Berkshire Hathaway, which already owned 23% of BNSF, made a $26 billion offer in November 2009 to buy the rest, valuing the company at $34 billion and assuming $10 billion in debt. Warren Buffett's timing on the deal was near-perfect, buying a railroad near the depths of the economic downturn during the financial crisis.
A transcontinental railroad deal might provide Berkshire Hathaway an outlet for some of the cash it's been accumulating after being a net seller of stocks for 10 straight quarters. Berkshire's cash hoard hit a record $347 billion at the end of the first quarter.
CSX has a $64.55 billion market cap, while NSC is valued at $62.5 billion. Union Pacific has a $134.9 billion market value.
Berkshire Hathaway stock has seen a steady slide after closing at a 52-week high on May 2 — right before Warren Buffett announced that he would step down as CEO at the end of 2025.
Berkshire Q2 earnings are due Aug. 4, according to FactSet. CSX reports earnings after the close on Wednesday.
BRKB, CSX, UNP, NSC
Berkshire Hathaway stock rose 1.5% in early Tuesday stock market action. BRKB is aiming to extend its winning streak to five sessions, though it remains below its 200-day moving average.
CSX rose 1.6% to 34.92 early Tuesday. CSX is climbing in a buy zone above a 33.82 buy point from a cup-with-handle base, according to MarketSurge. The buy zone runs through 35.51.
NSC added 0.8%, rising to 279.72, also rising within a buy zone following Friday's breakout past a 270 buy point from a double-bottom base. The buy zone runs through 283.50.
UNP rose 1.7% to 229.47.
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