Buffett Beyond Value: Why Warren Buffett Looks to Growth and Management When Investing

Chapter 22. Property, Plant, and Equipment: Good or Bad?

Warren and I have hated railroads our entire life. They are capital intensive. ... [They] have long been a terrible business and have been lousy for investors.^[177]

—Charlie Munger

Despite what Charlie Munger claimed, from 2006 to 2008, Berkshire acquired 70.1 million shares of a U.S. railroad, Burlington Northern Santa Fe. It is currently one of the largest Berkshire holdings, with a market value of $5.3 billion at the end of 2008. With the November 3, 2009, Berkshire announcement of a plan to acquire the remaining shares, Burlington Northern will become a wholly owned subsidiary in 2010. So, have Buffett and Munger changed their opinion on investing in capital-intensive companies, or is there more to it? Even before the Burlington investment, Berkshire often invested in capital-intensive companies. Buffett had invested in U.S. Airways, PetroChina, and POSCO (a Korean steel company), all of which are relatively capital-intensive.

Capital Intensity

Let's examine Berkshire's 10 largest common stock holdings to understand whether Buffett prefers low-capital-intensity companies. In Table 22.1, I present an analysis of Berkshire's 10 largest holdings to understand their levels of capital intensity.

There are only three companies that could easily be classified as highly capital intensive, with property, plant, and equipment (PPE) as a share of total assets above 50 percent. These three are Burlington Northern Santa Fe, ConocoPhilips, ...