Category Archives: Special Report

Special Report: BYD, Berkshire’s Tesla

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While Tesla has grabbed major headlines the past few years, China’s BYD Company Limited has grown from just 20 employees in 1995 to over 190,000 today, and in the process become the world’s largest rechargeable battery supplier.

The company has some 16,000 R&D engineers.

In 2015, BYD jumped to number one in worldwide EV sales thanks to the popularity of its Qin sedan and Tang SUV, beating Nissan, Tesla, Volkswagen and Toyota.

The growth directly benefits Berkshire Hathaway. In 2008, Berkshire Hathaway bet on BYD’s potential and purchased 225 million shares for $230 million, and now owns roughly 9.1% of the company.

Today Berkshire’s stake in BYD is worth roughly $1.77 billion.

Like Tesla, BYD is both an automaker and a battery maker. The company purchased Xi’an Tsinchuan Auto Co., Ltd. in 2003 and has aggressively pursued both the auto and bus businesses.

BYD sold 437,725 autos in 2014 in China alone, and became the first Chinese company to successfully enter the Japanese bus market. Its sales goals for 2015 were 15,000 electric cars and 6,000 electric buses, and in 2016, the company plans to enter the electric truck market.

Unlike Tesla, BYD manufactures both gasoline-powered and electric cars, including traditional fuel cars, dual mode electric cars, and electric-only cars and buses. BYD has jumped into the EV market with a broad range of vehicle types, including the bus, coach, taxi, private car, urban logistics truck, sanitation truck and construction truck (concrete mixer); and 4 specific off-road vehicles for use in the warehouse, airports, ports and mining.

Pure Electric Buses

It is in the bus market that BYD is making rapid progress. BYD’s zero-emission pure electric buses have already been deployed in Brazil, China, Columbia, England, India, Malaysia and Thailand.

Air pollution and carbon emissions are the key drivers of the move to pure electric buses. In China, diesel buses make up just 10% of the vehicles on the road but contribute over 30% of city air pollution and GHG emissions.

In April 2016, BYD achieved its 10,000 pure electric bus milestone, an achievement six years in the making.

BYD’s C9, is a two-axle, 40′ coach with the seating capacity to carry 47 people at highway speeds for over 190 miles. The buses use an iron-phosphate battery that after 10,000 charge cycles will still retains 70% of its capacity.

Its largest bus, the K10A, is a 15-meter bus that seats 95 passengers, and is now in service in São Paulo, Brazil.

London saw its first pure electric zero emission double decker bus debut in October 2015, and a fleet of 51 single-deckers debuting in the fall of 2016.

As BYD looks to pure electric bus sales across Europe, it has announced a €20 million investment in a bus assembly plant in the northern Hungarian city of Komárom. The Hungarian plant will begin production in the first quarter of 2017, and will have its own R&D center and battery test facility.

In the U.S. market, BYD has primarily focused on bus sales,becoming the dominant player in the electric bus market. It built a massive 450,000 sq. ft. assembly plant in Lancaster, California.

BYD’s e-buses operate in transit agencies, universities and airports across North America, with more than 40 customers including LA Metro, Los Angeles Department of Transportation, Stanford University, UCLA, UC San Francisco, UC Irvine, Anaheim Resort Transportation, Long Beach Transit, Denver Regional Transportation District, City of Albuquerque, SolTrans, SunLine Transit, Link Transit, COMO Connect, Antelope Valley Transit Authority, and many others.

In the spring of 2015, it also announced a pilot program with Uber in Chicago that uses BYDs E6 sedan. The car is a cross between a sedan and SUV, and currently gets roughly 186 miles (300 km) of driving range per charge. The 2016 E6 will reportedly get a range increase to 250 miles (400 km).

BYD’s biggest breakthrough in the U.S. market came in September 2015, when it won a contract with the Washington State Department of Transportation (WSDOT) for up to 800 heavy duty buses from all different propulsion types that includes 12 different categories for all-electric buses. The buses will serve public transportation systems in the states of Washington and Oregon.

The Explosive Growth of Pure Electric Vehicles in China

In China, it took ten years to go from zero electric vehicles to the current 1%, but it may take only another five years to reach 10%.

And, even more amazing is that sales of new energy vehicles in China are projected to hit a whopping 30% by 2025.

BYD notes that the production and sales of new energy vehicles exceeded 300,000 units in China in 2015, representing a three-fold growth year-on-year, and accounting for a 1.3% share of overall vehicle sales.

Strength Around the Globe

While Tesla has struggled in China, laying off 30-percent of its workforce in March 2015, and has its goal of manufacturing in China still on the drawing board, BYD is already a major player. BYD not only has a factory in Shenzhen, but has captured half of the electric car market. Its home field advantage has it selling over 6,000 of its popular stylish QINs per month.

BYD is also having an easier time in emerging markets. It is opening a factory in Brazil by the end of 2015, and is using its strength in pure electric buses as its way to enter the market. What’s more, it beat all U.S. car manufacturers to the Cuba market. In July 2015, the company inked a deal with the Cuban government for the purchase of 719 vehicles to be the first fleet of tourist rental cars. The cars will be traditional fuel vehicles but will give BYD a major foothold in the country, and they are already planning to introduce electric vehicles, and move beyond tourist car rentals to government official vehicles and the nascent private car market.

In September 2015, BYD had its first substantial sale in Africa, signing a deal to sell 10,000 vehicles to Sudan’s state-run company GIAD Motor Co Ltd.

The 7+4 Strategy in Australia

BYD’s comprehensive “7+4” electrification strategy in the Australia region aims at electrification of all forms of ground transportation: urban bus, coach, taxi, passenger car, urban logistics trucks, construction trucks, and urban sanitation trucks (7), as well as vehicles for warehousing, mining, airports and ports (4).

In 2016, the BYD e6 taxi got the green light to access the Australian market becoming the first Chinese made electric vehicle to be certified by the Australian Design Rules (ADRs), the country’s stringent technical standards for emissions, vehicle safety and theft resistance.

The company was already in the Australian market with its pure electric buses in a shuttle service tested for Sidney Airport between December 2014 and May 2015, and it has also sold its pure electric forklifts in Sydney and Melbourne.

A Willing Partner

BYD’s technology makes it an excellent partner with other manufacturers, as cities around the world race to meet ambitious climate change and pollution goals.

In July 2015, BYD signed a deal worth $29.6 million deal with British bus manufacturer Alexander Dennis Limited (ADL) to build 51 single-deck zero-emission buses for London. The buses utilize BYD’s chassis and electric drivetrain with the bodies supplied by ADL. The first 51 buses went into service in September 2016, following a three-year trial that proved the buses could consistently run a 16-hour shift without a recharge. The partnership helps London move towards its goal of having all single-deck buses totally emission-free by 2020.

“Our deep experience of not only battery technology but the critical battery management systems and driveline components necessary to deliver unequaled range and reliability are matched to ADL’s strong track record in building low weight, attractive and durable buses,” said Isbrand Ho, managing director of BYD Europe.

Innovative Mass Transit Solutions

While Elon Musk touts the future prospects of hyperloops in dealing with future transportation needs, Chinese competitor BYD Co. LTD. is looking towards an existing mass transit technology, the monorail, as part of its answer to urban congestion issues. In October 2016, the company debuted its “SkyRail” monorail system in Shenzhen, China.

With a capacity of between 10,000 to 30,000 passengers an hour (each way) and a high speed of up to 80km/h, SkyRail is part of BYD’s focus on the development of layered rail transport that meshes with metro and bus systems. BYD refers to “three-dimensional green traffic” as part of its green mobility platform.

Dramatic Cost Savings Compared to Subways

The electric monorail is a kind of traffic network which interconnects multiple transit backbones in the city at one sixth of the cost of a subway system.

According to BYD, the total market for monorails just in China is in the range of 3 trillion yuan ($450 billion).

BYD’s 4.4 kilometer monorail line at its Shenzhen Headquarters alleviates the traffic problems of 50,000 factory and management employees.

The first commercial sale of BYD’s SkyRail will be to S. Korea.

BYD’s B-Boxes and Vehicle Emergency Power Supply

Like Tesla, BYD has jumped into the home power storage business. The battery maker’s B-Boxes consist of fire-safe, long-cycle Iron-Phosphate rechargeable batteries that perform the same function as the Tesla PowerWall Battery. BYD’s B-Boxes are already on sale in many European countries including Germany, UK, Italy, Spain, as well as in Australia and Africa.

In a move that puts it ahead of Tesla, BYD’s Qin EV300 and e5 cars are equipped with BYD’s signature VtoL function, in which the vehicle serves as a massive mobile electricity supply to power appliances like cookers, refrigerators, power tools and many others, so that users can rely on the vehicle to plan outdoor activities that depend on electricity, or in case of emergencies like power cuts or blackouts.

Berkshire’s BYD Investment

Despite Berkshire Hathaway’s reputation for avoiding high-tech investments, its stake in BYD, like its more recent stake in eVolution Networks, shows Berkshire is not going to be left out of companies on the cutting edge of technology.

(This article contains updated information from when it was first published.)

© 2015-2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Special Report: Is the Driverless Car a Threat to Auto Insurers?

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“Self-driving cars are a real threat to auto insurance business,” Warren Buffett said at the 2014 Berkshire Hathaway annual meeting. It was a comment that didn’t get a lot of attention at the time, but suddenly now everyone seems to be talking about self-driving cars and driverless cars.

With Google testing self-driving cars on public roads, some have touted this as a bellwether for a quickly approaching age of automation that has the driver taking the back seat.

Mercedes, BMW, Audi, and Tesla are just some of the companies that are moving ever closer to self-driving cars with a host of collision avoidance features that respond quicker and more precisely than a human operator can.

As for actually being self-driving, Mercedes-Benz wowed consumers at the Consumer Electronics Show in Las Vegas this past January with its self-driving car prototype, the F 015. Mercedes even created a video of its Blade Runner-esque vehicle driving itself to the trade show.

So, if this world is approaching, what does it mean for Berkshire Hathaway’s GEICO, or other auto insurers? Are they really dinosaurs unaware that a mega-asteroid is approaching to wipe them out?

Not So Fast

Bryan Reimer, a research scientist in the MIT AgeLab and the Associate Director of The New England University Transportation Center, doesn’t think the driver is headed for extinction just yet, or even in the near future.

“These technologies show a lot of promise, however, you are not going to get into a black box and say ‘take me somewhere’ at the consumer level,” notes Professor Reimer. “New technologies will reduce fatalities and accidents, but it won’t eliminate them.”

There’s Still a Need for the Human Operator

“Higher levels of automation in the vehicle will still have humans in a supervisory role,” Reimer adds, noting that the sophisticated auto-pilot in planes still has human operators even with planes separated by thousands of feet of airspace. “The more automation, the more skill and training you need,” professor Reimer explains, pointing out the extensive training that pilots undergo. In the case of cars, “we have no equivalent educational structure in place.”

He also adds that with the close spacing of cars, which can be in fractions of a meter, and the variability of road conditions, it make roadways “a much more dynamic environment and harder to predict.” With the enormous number of cars on the road, often coming from different directions, it makes “the speed of decision-making much tougher.”

Accidents Happen

In addition, any self-driving technology will have to coexist with human drivers for a long time to come. “If everything was automated, it would be much easier,” Reimer adds, noting that we a tendency to both “over-trust and under-trust technology.”

Google has conceded that during its test phase it has had 14 accidents over a span of six years and 1.9 million miles, but that enviable record didn’t come in the real world conditions of New York City rush hour traffic.

As self-driving cars move into the unpredictable world of everyday traffic, accidents happen. One of those accidents happened on July 1, 2015, when one of Google’s Lexus SUV prototypes was rear-ended in Mountain View, California. The crash sent three Google employees to the hospital with symptoms of whiplash.

Eleven of the fourteen accidents Google has had were rear-end collisions brought about by non-self-driving cars, highlighting the same potential danger for self-driving and non-self-driving vehicles.

A Wide Variety of Insurable Risks

Self-driving cars won’t mean the elimination of hazards. For example, there were 250,000 flood damaged cars from Superstorm Sandy in 2012, and in 2013 there were 699,594 cars reported stolen. Add to the mix everything from trees falling on cars, to vandalism, and there are not going to be many people that want to drive their new car without fire, theft and collision insurance. There certainly will be changes in insurance needs, as changes in the ownership structures mean more car-sharing and ride-sharing scenarios. The popularity of Uber and Lyft has already seen GEICO respond with ride-sharing insurance, which launched this past February, and you can expect more policy innovations as insurers meet new consumer demands.

A Safer World that Still Needs Insurance

We live in a lot safer world than we did a hundred years ago. Commercial buildings have automated sprinkler systems and fire alarms, and homes have smoke detectors and burglar alarms, yet they both still have fires and break-ins, and they still need insurance.

It’s likely that cars and trucks will too.

(This article has been updated since it was published.)

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Berkshire Hathaway’s Biggest Question

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Who will succeed Warren Buffett, who turns 85 in August, as the head of Berkshire Hathaway? This would seem to be the biggest question hanging over the shareholders of the massive conglomerate. Will it be Greg Abel, the head of Berkshire Hathaway Energy, or Ajit Jain, who heads up Berkshire’s reinsurance business? Both are frontrunners, especially since Vice-chairman Charlie Munger, who is himself 91 this year, specifically dropped their names in his shareholder letter included in the 2014 Berkshire Hathaway annual report. Yet while people speculate on Buffett’s successor, I would suggest there’s a far more important question. After all, CEOs come and go, and whoever follows Buffett and Munger will eventually be succeeded by others.

So, the biggest question is not who will succeed Buffett; it’s how will they be compensated. In other words, how will they participate in the growth of the company as compared to how has Buffett participated?

Can a unique situation be replicated?

Berkshire Hathaway may be unique in the sheer number of companies that operate under its umbrella. It’s not only a conglomerate; it’s a conglomerate of conglomerates. For example, Berkshire’s Marmon Group has 160 independent manufacturing and service businesses, and Berkshire’s Scott Fetzer Group oversees 21 diverse companies. But even this is not what is most unique about Berkshire. What’s most unique is that Warren Buffett is participating first and foremost just as you do, as a shareholder.

The most underpaid CEO in the Fortune 500

For a man overseeing a conglomerate with a market value of roughly $347 billion, you would think that Buffett receives sky high compensation, especially since that conglomerate’s share value has risen 1,826,163% (yes, that’s not a misprint) from 1966 to 2014. However, Buffett (and Charlie Munger) have annual salaries of only $100,000. What’s more, there are no stock options and no bonuses. Buffett and Munger’s rock bottom salaries mean that they are participating in Berkshire just like you are, as long-term shareholders that care more about increasing the underlying intrinsic value of the company than any short-term trick to boost the stock price.

Think that doesn’t matter?

“The more CEOs are paid, the worse the firm does over the next three years, as far as stock performance and even accounting performance,” notes Michael Cooper of the University of Utah’s David Eccles School of Business. Prof. Cooper co-authored a paper that proved just that.

Just look at David Zaslav, CEO of pay-TV channel Discovery Communications. Zaslav had a total compensation package of $156.1 million in 2014, yet the same year the stock lost a quarter of its value, even as the broader market boomed. The shareholders felt the pain, while Zaslav got the gain. That’s not exactly participating on the same basis.

At the 2015 Berkshire annual meeting, Buffett acknowledged that when CEO incentives get out of line with a company’s goals bad things can happen.

“Charlie and I believe in incentives, Buffett said. “But we have seen decent people get into trouble with incentives. The CEO promises a certain number, and his executives don’t want to make the CEO look bad. Egos get involved. You have to be careful in the messages you send as CEO. If you don’t want to disappoint Wall Street, your managers will react.”

A Hedge without the 2 and 20

Hedge fund managers built their fortunes on the 2% annual management fee and a 20% of the profits, but that’s not necessarily the same for the hedge fund’s investors, who don’t get that management fee to cushion any tumble in profits. Remember in 2008 when Buffett bet hedge fund manager Ted Seides that a low-priced index fund tracking the S&P 500 would beat the average of any 5 hedge funds over a 10-year period that Seides picked? Well, the “Million-Dollar Bet” is looking more and more like a sure bet for Buffett, because he knew the high friction costs would hurt the hedge funds’ returns.

In fact, Berkshire’s a conglomerate that operates as hedge fund without the management fee structure. Like a hedge fund, it can buy 100% of a company (unlike a mutual fund), it uses derivatives to increase its leverage and hedge its risk, and because its leadership is in lock step with its investors, all that benefit goes right to each shareholder.

Whose side will they be on?

In 2011, David Sokol, who once looked like the heir apparent to Buffett, abruptly resigned after it turned out that he had accumulated over 96,000 shares of Lubrizol before bringing the company to Buffett’s attention as a potential acquisition. Buffett later called Sokol’s actions “inexplicable” and “inexcusable,” and while the SEC dropped its probe, the Sokol fiasco showed that’s it’s not automatic that Berkshire’s leadership will align with its shareholders interests.

Or, as Charlie Munger has said, “Trustworthiness is more important than brains.”

Berkshire’s Future Leadership

Berkshire’s future generations of leadership may be great stock pickers, able to build portfolios that equal the $100 billion portfolio that Buffett built. They may be great capital allocators like Buffett, able to use the profits from one company to by other companies with even greater growth potential. They might even be as savvy opportunists, unleashing Berkshire’s mountains of cash just when others credit has dried up. However, the big question is whether they do it on the same basis as Buffett and Munger, on behalf of all the shareholders.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Special Report: CORT Furniture Courts Academic Institutions

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With formerly generous relocation dollars in short supply in the aftermath of the 2009 recession, CORT Furniture has been aggressively seeking new markets. While relocation dollars still exist, “companies are no longer giving them out like candy,” says George Bertrand, CORT’s Regional Vice President for Operations and Sales.

Founded in 1972, and acquired by Berkshire Hathaway in January 2000, CORT’s primary business is providing rental furniture for homes, businesses and events (including trade shows), and providing relocation services. The company’s service area is the U.S. and the U.K., and annual revenues for all CORT operations exceeds $420 million.

Earnings in 2014 were roughly $36 million.

Seeking New Markets

With its core business hit hard by the 2009 recession, CORT expanded into the party rental business with the 2011 acquisition of the Seattle-based ABC Special Event Rentals, and the 2014 acquisition of another Seattle-area party rental business, AA Party Rentals. Party rentals now make up roughly $12 million in CORT’s annual revenues.

Academic Institutions Offer Opportunities for Growth

Another market CORT sees great potential in is providing furniture leasing to academic institutions.

Traditionally, academic institutions maintain huge inventories of furniture for dorm rooms that requires a high degree of maintenance and upkeep. These days, colleges and universities are increasingly aware that the on-campus quality of life is a major selling point to prospective students. They have upgraded athletic facilities with rock-climbing walls and rows of treadmills, and they have upgraded food services with gourmet entrees that are a far cry from the bland foods of yesteryear. They have also upgraded the dormitory experience, and in this area CORT is providing solutions that include furniture delivery service and ongoing maintenance.

Currently, only 14.3 percent of academic institutions are outsourcing their furnishing services, offering CORT a huge potential market for expansion.

According to CORT’s own survey, which they conducted with University Business Magazine, “budget restrictions” were the biggest impediments respondents cited in providing up-to-date and top condition furniture for students’ dorm rooms.

According to the survey results:

87 percent of respondents stated that budget and personnel restrictions are the biggest challenges facing their institution.

95 percent said the appearance and condition of their furnishings is important or very important to the maintaining the college’s image and integrity.

However, 37 percent described their furnishings as “outdated” and almost 20 percent said it’s “showing its age.

Out-sourcing their furniture needs to CORT is one way for institutions to keep their focus on academics, rather than on running a used furniture empire. CORT puts it simply. “Furniture leasing is a simple and affordable solution, especially as many colleges and universities are trying to meet increasing expectations with less available resources.”

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Special Report: Is the Tesla Battery a Threat to Berkshire Hathaway?

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Elon Musk’s recent announcement of Tesla’s new home and industry battery business, which will enable the storage of solar and wind energy, would seem to directly threaten Berkshire Hathaway Energy’s role as one of the world’s largest energy producers.

But not so fast.

Let’s Look at the Big Picture

First, Tesla’s leading-edge automobiles have done a lot to popularize plug-in electric vehicles. These vehicles draw their power primarily from electric utilities, and as the technology takes hold with more mainstream automobile producers, such as Toyota, GM, and Ford, the total demand for electric power will skyrocket. Sure, some of the power may come from home-based electric generation through solar panels, but the total demand for electric power will rise as consumers switch from gas and diesel powered vehicles.

Secondly, for home and industry battery applications, Berkshire may benefit in multiple ways. Its minority ownership in Chinese battery maker BYD Co Ltd could prove a very wise investment, as the company adds 6 gigawatts per year of battery production capability over the next 3 years.

The End of the Utility?

Will solar panels linked to a Tesla Powerwall mean that the centralized distribution offered by utilities will be irrelevant? Maybe for someone living in the backwoods, or far out in the desert, but not for anyone still hooked up to the grid.

Net metering, which feeds excess electricity consumers produce back into the grid, and creates a billing mechanism that credits consumers, makes the batteries irrelevant, as they produce no cost-saving or other advantage.

Berkshire Hathaway Energy’s CEO Greg Abel thinks that Tesla’s storage technology would have to drop greatly in price for it to be applicable to BHE’s transmission business.

Abel called the technology, “not game-changing, and it’s because of the cost structure,” during a panel discussion put on by the Calgary Chamber of Commerce. “Is there an opportunity to now implement that into our systems, into our transmission and distribution systems? Absolutely. And is it completely cost-effective, no. It’s got to get cheaper.”

Don’t Forget Duracell

Berkshire’s acquisition of P&G’s Duracell unit, may shake things up if it can get Duracell to transition from the alkaline battery business to newer battery technologies, the company might be in just the right place to market products similar to Tesla. It certainly has the resources to do it, as the P&G deal includes $1.8 billion in cash.

Lastly, large-scale battery storage is just what Berkshire Hathaway Energy’s solar and wind farms need, be it the 550-megawatt photovoltaic Topaz Solar Farm in San Luis Obispo County, California, or the just announced 400-megawatt Grande Prairie Wind Farm in Holt County, Nebraska. The ability to store energy for the times that the sun isn’t shining and the wind isn’t blowing is just what utilities need to fully pull away from fossil fuel based energy generation.

In summary, new home and industry storage battery technology will give Berkshire Hathaway new competition for its existing companies, but it will also bring new opportunities.

(This article contains updated information)

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Special Report: Passenger Service Little Known Part of BNSF

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With the founding of Amtrak in 1971, most people have assumed that the major class 1 railroads, which include Berkshire Hathaway’s wholly-owned BNSF, got out of the passenger rail business.

The exodus was logical, as post WWII passenger service had become a tremendous money drain with the advent of jet air travel and the building of the interstate highway system. That one-two punch sent ridership plunging.

But Not So Fast

While it is true that long distance passenger rail service is now the purview of Amtrak, BNSF still moves over 27 million passengers a year in regional passenger rail service that includes Chicago, Seattle, and Minneapolis. Chicago alone has more than 25 million passengers annually served by 106 BNSF trains.

BNSF’s role in each region is different. For example, in Minneapolis, BNSF provides the locomotives, and the Metropolitan Council, the regional governmental agency, owns the rolling stock and provides train crews.

In Chicago, BNSF operates the trains and leases the equipment under a purchase of service agreement to METRA, the commuter rail division of the Regional Transportation Authority of the Chicago metropolitan area.

In Seattle, Sounder commuter rail is operated by BNSF on behalf of Sound Transit.

In all these cities, commuter rail helps reduce congestion on local highways. A single bi-level commuter rail car can carry as many passengers as 120 automobiles, and a train produces less emissions than an equivalent number of automobiles.

Ensuring a Profitable Business Model

What all the commuter lines have in common is they are all profitable for BNSF. Commuter rail is still just a small part of BNSF’s overall business, but BNSF has laid out a list of Commuter Rail Principles that keep it profitably in the commuter rail business:

• Any commuter operation cannot degrade BNSF’s freight service, or negatively affect BNSF’s freight customers or BNSF’s ability to provide them with service.

• BNSF must be compensated for any and all costs incurred in providing commuter service and must make a reasonable return for providing the service.

• Capital investments necessary for commuter service are the responsibility of the public, including investments for future capacity.

• BNSF will not incur any liability for commuter operations that it would not have but for those operations. These operations are provided by BNSF primarily as a public service.

• Studies of how commuter service might be provided must take into account not only the current freight traffic levels, but also projected freight traffic growth.

•Investments made for commuter projects must not result in BNSF incurring a higher tax burden.

• BNSF must retain operating control of rail facilities used for commuter service. All dispatching, maintenance and construction must be done under the control of BNSF.

• Studies must reflect BNSF’s actual operating conditions and cost structures.

• BNSF will limit commuter operations to the commuter schedules initially agreed upon. Future expansions will have to undergo the same analysis and provide any required capital improvements.

•Improvements must include grade-crossing protection and intertrack fencing as required to minimize the risk of accidents.

Commuter rail is not BNSF’s only connection to passenger service. In addition to the passenger service provided directly by BNSF, some 64 Amtrak trains operate daily on over 6,500 miles of BNSF host track.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Special Report: Can Berkshire’s Nebraska Furniture Mart go for $2 billion with Dallas store?

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A furniture chain that produces over a billion dollars in annual revenue is a big deal, and it’s an even bigger deal when the chain has only three stores.

This is the case with Berkshire Hathaway’s Nebraska Furniture Mart (NFM), which with only 3 stores located in Omaha, Nebraska; Kansas City, Kansas; and Des Moines, Iowa, generates almost $1.04 billion in annual revenue.

That’s enough business to land NFM on the National retail federation’s “Hot 100” for 2014 despite its limited number of outlets.

The big question is whether NFM can reach $2 billion in annual sales when it opens its fourth store in the spring of 2015 at The Colony of Dallas-Fort Worth, Texas. Dallas-Fort Worth is the 4th largest metropolitan area in the United States.

Bigger is Best

NFM is known for its mega-sized stores, which include its flagship 420,000 square-feet facility in Omaha.

The new Dallas-Fort Worth store will up the ante, boasting a 1.9 million-square-foot facility featuring a 560,000-square-foot showroom that is expected to generate over $600 million in revenue annually.

A New Real Estate Play

Flying in the face of the adage that the era of the mall is dead, with retail migrating more and more to the internet, NFM is crafting a powerful regional draw that takes up lots of actual physical space rather than just cyberspace.

NFM stores have traditionally been stand-alone facilities, but with the new Dallas store NFM is developing a 400+ acres, 3.9 million square-feet mix of retail, entertainment, dining and attractions that is going by the name of Grandscape.

In addition to retail, the facility will include a hotel and amphitheater, office space, and ±300 multi-family units. NFM is betting that 18 million visitors will come to Grandscape each year, with 8 million of those visitors hopefully shopping at Nebraska Furniture Mart.

Excitement is running high even among the retailers that will be outside of the actual Grandscape footprint, and some are planning to build duplicate stores on either side of the highway to take advantage of Grandscape’s anticipated drawing power.

Average household income in the 12 county area is $57,431 with a total population in North Texas of 6.5 million. In addition, NFM believes it can draw from a huge four-state area with people traveling from as far as 300 miles away.

Revenue Projections

Is $2 billion in annual revenue realistic for four stores? Even four mega-stores? NFM is projecting that sales will grow 7% annually for the first decade with 3% growth thereafter. While 7% annual growth sounds optimistic, it is less than half of NFM’s 15.4% growth in sales in 2014.

Perhaps the bigger question is who says you have to stop at four stores?

© 2014 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results

Special Report: Working for Berkshire Hathaway: “I don’t want to work for a big corporation!”

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“I don’t want to work for a big corporation!” It’s popular sentiment among those with an entrepreneurial bent. What was surprising to me was those words were being spoken by one of the managers at Forest River Inc., a leading manufacturer of recreational vehicles, pontoon boats and buses that is owned by Berkshire Hathaway.

Corporate bureaucracy

Scott Adams, creator of the Dilbert cartoon strip, told USAToday, “Corporate bureaucracy ‘would be top on the list of sucking the life force out of [workers], making them feel helpless.”

Back to the manager I was speaking with. He had sold his company to Forest River a number of years back and at that time had several options. He could start another company, and face all the challenges of a new start-up; he could go to work for another corporation; or he could join Forest River as the manager of the division that had purchased his company. He chose the third option and became a general manager at Forest River, and by doing so he became one of the 335,245 employees of Berkshire Hathaway.

How big is a company that has 335,245 employees? By comparison, Exxon Mobil Corp. has only 75,000 employees.

About Forest River

Forest River itself is no small company. It has close to 6,000 employees that work at 71 manufacturing facilities. Its RV product lines include Forest River RV, Coachman RV, and Shasta RV; its boat division includes Berkshire Pontoons and Southbay Pontoons; and its bus division includes Glaval Bus, Elkhart Coach, and Starcraft Bus. In addition to RVs, boat and buses, the company also manufactures mobile offices, manufactured housing, park trailers and cargo trailers.

All combined, Forest River produced $3.3 billion in revenues in 2013, which was up 24% from 2012.

Back again to the manager who didn’t want to work for a big corporation. Over the time I have known him he has consistently described the operating climate at Forest River as anything but bureaucratic. It has more the entrepreneurial spirit of a smaller company. It’s a spirit that comes from the company head Peter Liegl.

Warren Buffett on Peter Liegl

Peter Liegl founded Forest River in 1996 and stayed on as its president when Berkshire Hathaway acquired it in 2005. In Berkshire’s 2005 Annual Report, Warren Buffett described Liegl.

“Pete is a remarkable entrepreneur. Some years back, he sold his business, then far smaller than today, to an LBO operator who promptly began telling him how to run the place. Before long, Pete left, and the business soon sunk into bankruptcy. Pete then repurchased it. You can be sure that I won’t be telling Pete how to manage his operation.”

Buffett has lived up to his word, keeping a hands-off approach to Forest River. At the 2014 annual meeting he noted that he had only called Liegl “three or four times over the past decade.”

Hands-Off Approach

Buffett’s hands-off approach is what has separated Berkshire Hathaway from the typical conglomerate’s top-down management structure. It is what has enabled Peter Leigel to grow Forest River through an entrepreneurial style that values and retains top managers.

And it is what has enabled one of Forest River’s managers to say proudly “I don’t want to work for a big corporation!”

© 2014 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results

Special Report: See’s Candies: Eastward Ho!

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If you are reading this on July 20th, it is National Lollypop Day and you can get a free lollypop at your local See’s Candies store.

If you are a Berkshire Hathaway shareholder, you can get something sweet every day from See’s Candies, as the wholly owned Berkshire Hathaway company continues to sweeten Berkshire’s bottom line with a steady stream of profits.

Acquired in 1972 for only $25 million, See’s Candies today has over $400 million in annual revenues with just under a quarter of that as profit. That means it annually produces four times its acquisition cost in profit. Pretty sweet.

See’s Candies was founded in 1921 in Los Angeles by Charles and Florence See, using the recipes of Charles’s mother, Mary See. Over almost a century, the porcelain-white stores with the white-and-black checkerboard floors grew to be West Coast candy icons.

Today, the company produces 26 million pounds of candy annually and employs over 6,000 people.

Recent annual revenue growth has been around 4%, and the company is adding 10-12 new stores per year.

Growing Eastward

Currently there are more than 200 company-owned shops in the western half of the U.S., and limited distribution in department stores, along with a handful internationally in Hong Kong, Macau, Taipei, and Tokyo, and pop-up stores for the holidays all across the country. But until recently, the place you couldn’t find a full-fledged store was east of the Mississippi River.

No wonder generations of Easterners have brought home See’s chocolates from their trips to California.

All of that has begun to change as See’s has looked eastward, opening stores in Ohio (in Cincinnati and Columbus) and two stores in Pittsburgh, Pennsylvania in 2013.

Supersizing

The other big change for See’s is in the size of its stores. See’s shops have long been under 1,500 square-feet and have featured a single candy counter. This works fine most of the year, but as some 50 percent of See’s business is during the end-of-year holiday rush (when customers grow impatient with waiting in line), the company is experimenting with supersizing some of its new stores.

November 2013 saw the debut of a double-sized, 3,000-square-foot store in Orange County, California, that featured two candy counters and four cash registers instead of the usual two.

Buffett’s Crystal Ball

The evolution of See’s was long anticipated by Warren Buffett, who believes that a solid business evolves over time even if it is meeting the same need.

In his 1996 Annual Letter he wrote:

“Today, See’s is different in many ways from what it was in 1972 when we bought it: It offers a different assortment of candy, employs different machinery and sells through different distribution channels. But the reasons why people today buy boxed chocolates, and why they buy them from us rather than from someone else, are virtually unchanged from what they were in the 1920s when the See family was building the business. Moreover, these motivations are not likely to change over the next 20 years, or even 50.”

Almost two decades later it’s clear that Buffett was right about the “next 20 years.”

Now it’s on to the next 30.

© 2014 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Special Report: Will Natural Gas Fuel BNSF’s Future?

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The diesel locomotive is one of the most efficient transporters of freight, with decided cost advantages over moving similar goods by truck. According to CSX, moving goods by train is three times more fuel efficient than truck transport, and the Association of American Railroads (AAR) estimates that freight railroads move a ton of freight an average of 476 miles on just one gallon of fuel. Still, despite this advantage, BNSF and other long-haul freight railroads are looking for even greater efficiency and cost savings with the development of locomotives that run not on diesel but on liquefied natural gas.

A Game Changer

The switch to liquefied natural gas would be the biggest change since railroads shifted from steam-powered locomotives to diesel-powered back in the 1950s.

According to the U.S. Department of Transportation, Class 1 railroads, which include BNSF, used a combined 3.6 billion gallons of diesel fuel in 2012. In total the seven Class 1 railroads accounted for 7% of all diesel consumed in the U.S. during 2012.

Of those railroads, Berkshire Hathaway’s BNSF was the single largest consumer, using 1,335,417,552 gallons of diesel at a cost of $4,273,779,000. This almost $4.3 billion in fuel cost was one of BNSF’s primary expenses, representing 29% of BNSF’s total operating expense.

Here Comes Natural Gas

Using liquefied natural gas to power locomotives is hardly a new concept. Burlington Northern tested it in the 1980s, and Union Pacific looked at it again in the 1990s. The difference today is the tremendous domestic natural gas boom that has driven down natural gas prices even as oil prices have neared all-time highs.

In addition, pollution and global warming concerns make liquefied natural gas all the more attractive. Natural gas is the cleanest burning of all fossil fuels, and would not only help railroads meet the EPA’s Tier 4 air emission regulatory standards, but would also significantly reduce CO2 emissions.

Burning natural gas creates far lower amounts of sulfur dioxide and nitrous oxides than burning diesel fuel, and natural gas produces only 117 pounds of CO2 emitted per million BTUs of energy, as compared to a far heftier 161.3 pounds of CO2 for diesel.

Potential for Enormous Savings

While the environmental benefits are compelling, it is the cost savings that has railroads most excited. Natural gas production is booming and prices have dropped to roughly one-third of their 2005 price levels. Goldman Sachs estimates that for the next two decades natural gas will trade in the range of $4 to $5 per million BTUs, down from over $15 in 2005.

In 2012, energy equivalent pricing of Brent Crude oil, which is the global price benchmark for Atlantic basin crude oil, was roughly seven times the Henry Hub natural gas spot price, which is the pricing point for natural gas futures on the New York Mercantile Exchange. And the U.S. Energy Information Administration (EIA) is currently projecting that a substantial gap will continue to exist between oil and natural gas prices through year 2040 and perhaps beyond.

This isn’t about pennies, it’s about dollars. Lots of dollars. At current price levels, BNSF could save as much as $3 billion per year.

Fuel Supply Security

Liquefied natural gas also gives railroads and the U.S. fuel supply security, as it is a purely domestic product unaffected by Middle-East conflict. Currently, two-thirds of diesel fuel is imported. And, while Middle-East oil supplies dwindle, domestic natural gas production is growing.

For example, the 104,000 square-mile Marcellus field, which includes Pennsylvania, West Virginia and southeast Ohio, has seen its output grow by a whopping 10-times in just the past five years.

Cost of Conversion

Diesel locomotives cost roughly $2 million each and the cost of converting a locomotive to liquefied natural gas is approximately an additional $1 million. This cost may drop if liquefied natural gas becomes the standard rather than the exception, but even at current costs the average 20-year lifespan of a locomotive means substantial operating cost savings. BNSF has 6,700 locomotives, so some of Berkshire’s tens of billions in cash could be invested in-house to produce a mountain of cash over the next century.

Additional Hurdles

Besides conversion costs, the two other big hurdles are government regulations and upgrades to fuel delivery infrastructure.

The government has been moving slowly. The Federal Railroad Administration (FRA) is still developing the regulations for liquefied natural gas locomotives, with a particular focus on tender-car safety.

The other hurdle is the need for a new fuel delivery infrastructure to provide liquefied natural gas to train depots.

Neither of these hurdles looks to be prohibitive, as important environmental benefits provide the incentive to craft workable regulations, and railroads previously converted their infrastructures from handling coal to diesel fuel without much problem.

The big question is whether natural gas powered locomotives can really do the work of a diesel locomotive under all conditions. BNSF is working hard to find out. Four natural gas powered locomotives are being tested in high-stress environments, including the California dessert and the cold weather of the northern tier.

Summary

Despite higher initial capital costs, the long-term operating cost savings and environmental benefits of liquefied natural gas locomotives make them the likely kings of the rails well into the next century. BNSF should reap billions in cost saving over that period, which would make Berkshire Hathaway and its shareholders very happy.

(This article has been updated with new information.)

© 2014 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.