Buy Buffett Rail Debt, Sell Canadian National: JPMorgan

Warren Buffett’s railroad debt is a better investment for bond buyers than Canadian National Railway Co. (CNR), JPMorgan Chase & Co. (JPM) said.

The extra yield that Burlington Northern Santa Fe’s 10- and 30-year bonds pay over similar-maturity Canadian National debt makes them attractive, analysts led by Mark Streeter wrote today in a research note. BNSF is owned by Buffett’s Berkshire Hathaway Inc. (BRK/A)

BNSF’s profit improved to $937 million in the third quarter from $766 million a year earlier as shipping volumes increased. The railroad benefits from strong positions shipping coal and oil as well as a “robust” freight network, JPMorgan said.

“We think the best swap at the quality end of the rail spectrum is to sell Canadian National credit and buy BNSF,” the analysts wrote. “BNSF credit should trade basically on top of or slightly through and not behind peers.”

BNSF’s $650 million of 4.375 percent bonds maturing in 2042 yielded 3.93 percent yesterday, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority. That’s 43 basis points, or 0.43 percentage point, more than the yield on Montreal-based Canadian National’s $250 million of 3.5 percent securities maturing the same year, which traded at 99.9 cents on the dollar today.

BNSF was Buffett’s biggest takeover when Omaha, Nebraska- based Berkshire acquired the railroad in a $26.5 billion deal in 2010. The company is an “all-in wager” on the U.S. economy, the billionaire said at the time. Buffett, 82, is Berkshire’s chairman and chief executive officer.

Bonds from BNSF may be undervalued because some insurers have limits on how much debt they can own from Berkshire companies, the JPMorgan analysts wrote. Buffett’s implicit backing adds “significant value” to the bonds, they said.

Canadian National, the nation’s biggest railroad, said third-quarter net income rose less than 1 percent to C$664 million ($665 million). It said adjusted full-year profit may climb as much as 15 percent.

To contact the reporters on this story: Zachary Tracer in New York at ztracer1@bloomberg.net; Charles Mead in New York at cmead11@bloomberg.net

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net; Alan Goldstein at agoldstein5@bloomberg.net

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