Most people know Bill Gates as the world's richest man thanks to Microsoft (Nasdaq: MSFT), which he built into the world's largest software company.
However, today Microsoft represents only about one-fifth of his total holdings. His private investment company, Cascade Investments, and his charitable foundation, the Bill & Melinda Gates Foundation, hold most of Gates' assets.
His total assets, including his Microsoft stake, Cascade Investments and charitable foundation, are valued at over $100 billion. By selling his Microsoft stake over the years and diversifying his assets, Gates has focused on wealth preservation.
He plans to give most of his great fortune to charity -- but in his search for safety and stability, Gates is taking a page from past robber barons...
By investing in railroads.
The source of 19th-century fortunes for names like Vanderbilt and Gould, the railroad industry is just as important today. In 2009, Warren Buffett's Berkshire Hathaway (NYSE: BRK-B) made its largest purchase ever, buying rail transport company Burlington Northern Santa Fe for $34 billion.
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Gates' largest holding outside of Microsoft is Canadian National Railway Co. (NYSE: CNI), which is the largest railroad in Canada. Between Cascade Investments and his charitable foundation, Gates is the largest shareholder of Canadian National Railway, with a 12% stake.
Gates has been gradually building his stake, worth over $6 billion, since 2006 when he disclosed owning over 5% of the company. Since 2006, CNI is up close to 200%, while the Dow Jones Industrial Average is up a mere 35%.
A driving force in the Canadian economy
Canadian National Railway operates a railroad network that stretches over 20,000 miles and connects three coasts: the Atlantic, Pacific and Gulf of Mexico. The railroad transports about C$250 billion (about $230 billion) worth of goods a year, including petroleum and coal, chemicals and fertilizer, grain, forest products, metals and auto parts.
In the first quarter, Canadian National Railway beat earnings expectations by C$0.04, and total net income was up 12% from a year ago. Revenue rose almost 9% and was C$60 million higher than analyst estimates. These results were particularly impressive considering the harsh winter weather in Canada and the U.S.
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Due to the delay in approving the Keystone XL pipeline, Canadian National Railway remains the primary way that crude oil from Canada moves to the Gulf of Mexico. Even if the pipeline gets approval, it will be years before it is constructed and still will not be able to handle the growing production from the tar sands in northern Canada.
Another growth driver for Canadian National Railway is the need for "frac sand" in shale drilling and hydraulic fracturing. Canadian National Railway's revenues from frac sand shipments were up 23% in the first quarter, and this growth will likely continue. Rail remains the easiest and most convenient way to deliver frac sand to the shale regions of North Dakota and Montana. Canadian National Railway has expanded its Wisconsin facility to meet the demand for frac sand.
Canadian National Railway also remains well positioned to capitalize on the global food boom (which I wrote about earlier this month). The company benefits in two ways: First, it ships the fertilizer that the farmers need to grow their crops. Then, the farmers rely on Canadian National Railway to ship their grain to ports for export. Thanks to an expected record Canadian grain crop this year, Canadian National Railway projects its grain volumes will be 13% higher than average.
Shares of Canadian National Railway also look more attractive than the second-largest railroad in Canada, Canadian Pacific Railway (NYSE: CP). CNI trades at a forward price-to-earnings (P/E) ratio of 15.9 and an enterprise value-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of 13. Its operating margin is an impressive 36%. Canadian National Railway also offers a 1.5% dividend yield, which is only a 28% payout of earnings.
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In comparison, Canadian Pacific Railway trades at 17.3 times next year's earnings and an EV/EBITDA ratio of 16. Its operating margin is lower at 31%. Canadian Pacific Railway's dividend is also less than half Canadian National Railway's, coming in at 0.7%.
Risks to Consider: Canadian National Railway is highly dependent on the state of the U.S. and Canadian economies. In an economic slowdown, Canadian National Railway's rail shipments will be affected.
Action to Take --> Trading at the industry-average forward P/E of 20.8 would put CNI at $81. That's upside of 30%.