Warren Buffett's railroad is going to reap the benefits of coal's comeback

Rick Wilking/Reuters

UBS is bullish on railroad stocks, and part of the reason is the recent uptick in coal production, which has been driven by higher natural gas prices and optimism surrounding the election of Donald Trump.

In a note circulated March 17, UBS reinforced its buy rating and $288,500 price target for Warren Buffett's Berkshire Hathaway, the parent company of Burlington Northern Santa Fe Corp. (BNSF), one of America's largest railroads.

BNSF has a sizable exposure to coal and stands to benefit from an increase in coal cars.

According to UBS:

BNSF's revenues were down 9.9% y/y in 2016 with that decline primarily due to lower volumes in industrial products (-14.2% y/y) and coal (-7% y/y). We are expecting 4.5% y/y growth in the top line at BNSF in 2017, in part due to the easy comp after a challenging 2016, but also due to coal volumes rebounding.

Coal burn, or the rate at which coal is used by power plants, was down double digits in the first two months of 2016 but has had a strong start to 2017, gaining 6% in January and 1.5% in February. So far it's up 9% year-over-year in the first quarter of 2017.

Berkshire has gained 17.58% since the election of Donald Trump, partly due to holding its exposure to industrial companies. The broader S&P 500 is up 11.3%.

Markets Insider