Nov. 3 (Bloomberg) -- Warren Buffett’s $26 billion purchase of Burlington Northern Santa Fe Corp., the largest U.S. railroad, may attract more investors to an industry undergoing a “once-in-a-lifetime comeback.”

“Railroads have just gotten the biggest endorsement they possibly could,” said John Mims, an analyst at BB&T Capital Markets, who recommends buying Burlington Northern. “This will get people off the sidelines in an industry they’ve been wary to invest in. We’ll probably be saying in 10 or 15 years that a new rail renaissance began with this acquisition.”

Rail shares rallied after Buffett’s Berkshire Hathaway Inc. disclosed the deal to acquire the 77.4 percent of Burlington Northern it doesn’t already own. Union Pacific Corp., the carrier’s biggest competitor, rose the most since May 29.

Berkshire’s largest purchase spotlighted an industry struggling with dwindling freight demand. Buffett described his move was “an all-in wager on the economic future of the United States,” because shipments and railroads’ pricing power would rise in a recovery.

The billionaire investor is extending his bet on the industry after more than two decades of deregulation helped railroads cut labor costs, sell or abandon unprofitable routes and invest in more fuel-efficient locomotives. The 1980 Staggers Act legalized contracts between shippers and carriers and swept away a federal rulemaking structure dating to the 19th century.

Buffett cited railroads’ fuel-cost advantages over trucks in 2007 after his initial stake in Fort Worth, Texas-based Burlington Northern was disclosed. Today’s $100-a-share offer is a 31 percent premium to yesterday’s $76.07 closing price.

‘Very Rare’

Buying the rest of the carrier shows “this is an industry that has gone through a very rare, once-in-a-lifetime comeback,” said Anthony Hatch, an independent railroad analyst based in New York.

Railroads remain one of the lowest-cost ways to move goods over long distances, with a double-stacked train handling the equivalent of 320 semi-tractor trailer loads over highways, said Mims, who is based in Richmond, Virginia. Diesel fuel at U.S. pumps has risen 17 percent this year.

Besides attracting other investors to railroads, Buffett’s purchase may damp political pressure in Washington to reregulate shipping rates, said B. Craig Hutson, a Chicago-based debt analyst for Gimme Credit Publications.

‘Liked and Respected’

“Having someone of Buffett’s stature owning one of the four major railways makes it less palatable for D.C. to do something the railroads would find onerous,” Hutson said. “Buffett is well liked and respected in D.C.”

Union Pacific rose $4.35, or 7.9 percent, to $59.41 at 4 p.m. in New York Stock Exchange composite trading, while CSX Corp., the No. 3 U.S. railroad, climbed $3.13, or 7.3 percent, to $45.97. Norfolk Southern Corp. increased $2.52, or 5.4 percent, to $49.15.

Berkshire’s A shares rose $1,700, or 1.7 percent, to $100,450. Buffett didn’t return a message left with his assistant Carrie Kizer.

Burlington Northern and Omaha, Nebraska-based Union Pacific compete west of the Mississippi River. Burlington Northern focused on coal and agricultural shipments to close the gap with Union Pacific, which bought Southern Pacific Railroad in 1996.

Largest by Sales

Burlington Northern overtook Union Pacific as the largest in the U.S. by sales last year with $18.02 billion in revenue, topping Union Pacific’s $17.97 billion. CSX and Norfolk Southern operate primarily east of the Mississippi River.

Taking Burlington Northern private will remove Wall Street pressure to meet quarterly earnings estimates and may give the railroad more access to Berkshire’s capital for research and innovation, BB&T’s Mims said.

“This will sharpen up the railroad industry quite dramatically as they learn how to cope with growth again” after the recession, said Aaron Gellman, a professor at Northwestern University’s Transportation Center in Evanston, Illinois. “Everyone will be taking cues from Burlington Northern.”

The Standard & Poor’s 500 Railroads Index jumped 12 percent, bringing this year’s return to 24 percent, surpassing the 16 percent advance for the S&P 500 Index. Burlington Northern soared $20.93, or 28 percent, to $97.

Shippers Watching

Shippers aren’t sure of the implications of having the biggest U.S. railroad in private hands, said Bob Szabo, executive director of Consumers United for Rail Equity, a Washington-based coalition of freight customers that advocates for more pricing competition.

CURE is concerned that Buffett’s premium for the rest of Burlington Northern may “artificially inflate the asset base” next time railroads seek a rate increase, he said.

BB&T’s Mims said Burlington Northern may get a little more “aggressive” on pricing for its intermodal service, which already accounts for about a third of its business. Intermodal refers to containers that move by a combination of rail, road and sea.

Freight carloads on major U.S. railroads fell 18 percent this year through the week ended Oct. 24 compared with a year earlier, according to the Association of American Railroads.

Volume will start to improve in the coming months, making Burlington’s valuation “very attractive” for Buffett, said Art Hatfield, an analyst at Morgan Keegan & Co. in Memphis, Tennessee, who rates Burlington Northern “market perform.”

“He just sees this as a solid, well-run company going through a stage of economic retraction,” Hatfield said. “He doesn’t like fixer-uppers. It’s just Buffett buying a business he likes and understands.”

To contact the reporters on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net; Keith Naughton in Southfield, Michigan, at Knaughton3@bloomberg.net

Last Updated: November 3, 2009 16:20 EST