A major acquisition is coming to light this morning, as Berkshire Hathaway (NYSE: BRK.A, BRK.B) has announced that it is acquiring Burlington Northern Santa Fe (NYSE: BNI). The deal calls for BRK to dish out $100 per share in cash and stock for the 77.4% of BNI shares that BRK doesn't already own. The deal will cost BRK $44 billion.

The acquisition gives us a glimpse into the mind of the Oracle of Omaha, BRK's CEO Warren Buffett. He feels that the "country's future prosperity depends on it having an efficient and well-maintained rail system." Buffett is betting that railroads are going to do well, which would stem from prosperity in the American economy.

Is it time to ride the rails? In Gordon Pape's The Internet Wealth Builder, analyst Tom Slee reaffirms his buy rating on Burlington Northern Santa Fe (NYSE: BNI), his top pick in the sector.

"Burlington Northern is my preferred choice in the railroad industry. At first glance, Burlington Northern had a particularly bad first quarter.

"Profit was $0.86 a share, down sharply from $1.30 a share the year before. However, when unusual items such as an unfavourable coal rate decision are excluded, operating earnings amounted to a much more acceptable $1.13 a share, well above the 96c analysts were looking for.

"It's hard to find any good news these days but I was pleasantly surprised with the third-quarter railway results, as almost all of the 'class 1 carriers' reported better than expected earnings," notes analyst Tom Slee.

The contributing editor to Gordon Pape's Internet Wealth Builder explains, "Several rail stocks are starting to look attractive at these depressed levels and Burlington Northern (NYSE: BNI) remains my preferred choice in the group." Here's his outlook.

"Even with the economic downturn starting to bite, reduced fuel costs and increased freight rates offset lower volumes. Equally important, the companies remain cautiously optimistic despite the miserable outlook.

"They are confident that further freight rate price increases in the 4% to 5% range are sustainable and will still allow them to undercut inefficient truckers.

"Unfortunately, none of this prevented the stocks from being battered during the market collapse. However, I think that fourth-quarter profits are likely to remain strong and the longer term outlook for railroads remains favorable.

"Burlington Northern continues to power ahead. A shrinking economy must eventually take its toll but there was no sign of any weakness in BNI's third-quarter results. Operating earnings came in at $1.91 a share, up 29% from $1.48 in 2007.

CSX (NYSE: CSX), a transportation company whose competitors include Burlington Northern Santa Fe (NYSE: BNI), Norfolk Southern Corp. (NYSE: NSC), and Union Pacific Corp. (NYSE: UNP), reported earnings for the third quarter on Tuesday. The results weren't bad, driven in part by a drop in energy costs and an effort to keep costs under control.

Revenues increased 18%, approaching $3 billion. Earnings per share from continuing operations skyrocketed 40% to $0.94. As management pointed out, distributors are exploiting railways to the advantage of their supply chains. This is cool for shareholders of CSX, who obviously are hoping their company can successfully navigate the tough economic landscape that we're all trying to find maps for. And if oil prices continue to fall, then CSX may find it easier to manage its operations.

And there's another positive. According to this source, CSX beat analyst expectations by a penny. Unfortunately, according to that same source, management believes that it will hit the lower end of the spectrum in terms of its previous guidance. CSX is looking to earn between $3.65 and $3.75 per share for the fiscal year.

Taking everything together, I'm not sure I'd want to enter CSX at this time. It is well off the 52-week high, but it's not exactly near the 52-week low, either. Even though the energy picture might be moderating for the company, and even though its business does offer a compelling transportation service, I think a macro slowdown might send shares back toward the low. And according to this source, freight volume declined by over 2%. Problems in the automotive industry are negatively affecting CSX. Heck, problems in many industries will be with us for a while. CSX will see its operations pressured. And, again, that tells me that I'd have to see a big drop in the stock to find it attractive at this point.

Disclosure: I don't own any company mentioned; positions can change at any time.

"Railroads are a play on three big secular themes: the drive for increased energy efficiency, growth in coal and the agriculture boom," says Elliott Gue, a energy sector expert who has just returned from Japan where he was covering the G8 Summit.

Meanwhile, in his The Energy Srategist, he states, "Railroads are now among the most fuel-efficient forms of freight transport available." Here, he offers a bullish review of Union Pacific (NYSE: UNP).

"My long-held thesis on the group has been that the railroads are no longer totally dependent on the US economy for their growth.

"It's no longer appropriate to look at this sector as viciously economy sensitive. The traditional relationship between the broader market and the rails has been breaking down for several years, but this trend appears to be accelerating.

"In 2007, according to the Association of American Railroads (AAR), the average railroad moved a ton of freight a distance of 436 miles on a single gallon of diesel fuel. That makes freight trains roughly three to four times more fuel efficient than trucks.

"Union Pacific is the largest railroad in the US and has long been one of my favorites. The company's network is nearly 33,000 miles long and is concentrated in the West and Midwest. It also offers a convenient example of the bullish forces at work for the rails, particularly in the coal and agriculture industries.

"Having spent a lot of time recently studying the North American transportation industry, my conclusion is that trucking is on the decline while the railroads are poised to increase market share," notes Tom Slee.

The contributing editor to Gordon Pape's Internet Wealth Builder states, "The logical conclusion: buy rail stocks now." Here he looks at Kansas City Southern (NYSE: KSU) and Burlington Northern Santa Fe (NYSE: BNI).

"Who would have thought it? Railways are having a good year. They were supposed to be hunkered down, riding out the recession. Instead, the old iron horse is thriving.

"Surging demand for commodities is more than offsetting a slump in building materials shipments. Even higher energy costs are proving a plus for the railroads. Each jump in oil prices gives them a bigger edge over their gas guzzling competitors: trucks.

"Most important, the rails are able to raise rates despite the economic downturn. Their surcharges are sticking. Yet the stocks are out of favour.

"The railroad sector is one of the few reliable groups in today's market; with solid pricing power, these companies have a solid future moving forward," says contrarian Chris Johnson.

"We are adding CSX Corp. (NYSE: CSX) as a long position to the Insightful Investor portfolio. Here's his look at the stock, and an options play for those seeking leverage.

"Last week, our Earnings Tip Sheet highlighted CSX as a bullish pick ahead of earnings. The stock was positioned for a jump according to our Behavioral Valuation approach. One week and a positive earnings report later, we're looking to increase our exposure to the company.

"CSX has now reported earnings results that handily beat both the analyst forecast and the whisper number. The company overcame softness in some sectors through increased shipments in ethanol and grain as well as increased foreign demand for coal.

"Rail companies appear strong moving forward, given that rising crude oil prices are forcing companies to use more cost-efficient means to ship their goods.

"What's more, CSX was the first of the 'big four' rail companies to report earnings. The company should thus benefit from positive reports when its competitors enter the earnings confessional.

Railroad giant CSX Corporation (NYSE: CSX) recorded record revenue of $10 billion for FY2007, the first time the company has crossed that threshold. CSX also posted record gains for 4Q 2007. EPS increased 15% to $0.86 per share on net earnings of $365 million. 4Q operating income increased over $100 million to $609 million.

CSX posted good revenue and productivity growth despite being hit with big increases in fuel costs. The company also posted significant improvements in its safety record. Over the past three years, CSX has posted the highest share price gain of any major railroad in North America, gaining 10% in just the last two days.

CSX CEO Michael Ward forecasts double-digit growth in both operating income and EPS for 2008. The stock currently trades in the mid-40s and may be worth a look for investors seeking some stability in the stock market.

Readers of this space know that the preference here is for large cap companies, with demonstrated business models, and favorable long-term factors, that have the resources to ride-out short-term economic downturns, including recessions.

And in this category a railroad stock represent a prudent addition to a portfolio, for investors who can tolerate moderate risk.

Pick a railroad. Virtually any railroad. Odds are, you will do fine, long-term, as the nation continues to re-discover the valuable asset - - the national treasury, really - - of its railroads. (More on that latter topic, in a future blog.)

Here are the railroad plays, ranked by risk, with the top stock, BNI, being the lowest risk. A stop/loss, if one were to buy the stock, is also listed:

The revival of the rails is not exclusive to the United States. Canada is seeing a healthy growth in railroad services, and Canadian Pacific (NYSE: CP) is worth an evaluation.

Analysts see 5.7% revenue growth for CP in 2008, in Canadian dollars, with grain, fertilizer and oil sands-related shipment gains offsetting declines in forest products.

Also of note: Analysts also expect CP to continue to improve rail system efficiency and fluidity, and overall asset utilization.

The above positives, combined with CP's strong free cash flow and modest pricing power, make the company an acceptance investment for moderate-risk investors. CP's modest p/e of 13 also tips the risk/return ratio to the purchase side of the scale. The Reuters F2007/F2008 EPS consensus estimates for CP are C$4.27/C$4.78. [Note: Currency figures are in Canadian dollars].

The risks? Like other rails, Canadian Pacific is vulnerable to the economic cycle, hence a slowdown in the global and/or U.S./Canadian economies will hurt CP's results.

Stock Analysis: Canadian Pacific is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than two years should be rewarded from CP's shares. Sell / Stop Loss for the shares in this company: $44.

Most transportation officials agree that the United States' transportation infrastructure - - highways, roads, bridges, mass transit systems - - is in need of a major upgrade in order to meet the nation's transportation needs of the 21st century.

The nation's public officials will begin to address the above concern in the years ahead, as public funds become available, but until they do, and due to crude oil's sustained high price, an opportunity has emerged for another transportation form: you guessed it, the railroads. And Norfolk Southern Corp. (NYSE: NSC) is a railroad worth a review.

Norfolk Southern provides rail transportation in the eastern U.S. and Canada, operating a 21,000-mile rail network. It's an elaborate intermodal and coal service network that also has a large freight business.

To say the bears on Wall Street have gained some momentum in late November 2007 would be an understatement.

The consensus now argues that U.S. GDP growth has slowed substantially, with growth likely to remain sub-par through at least June 2008, and the Dow's 1,400-point drop in about a month reflecting that consensus.

Nearly every sector looks vulnerable. Still, some sectors are faring reasonably well. The rails are one, and among the rails, Burlington Northern (NYSE: BNI) is worth an evaluation.

For nearly 30 years, the rails -- long neglected in the United States -- were considered passé. Then the globalization era dawned, along with its exports and demand for agricultural products and coal. Add intermodal shipments and a price of oil that's basically risen for ten years and the results is - the rails are back.

Over the past year, transportation stocks have lagged other shares. Since last October, for example, the Dow Jones Transportation Index has lost 5.1%, while the S&P 500 index has gained 13.25%.

But not all stocks in the transport group have tracked the index. Railroad shares, for example, have outperformed both the sector and the overall market, with the S&P Supercomposite Railroad Index (a sub-index of the S&P Composite 1,500 index) rising by 17.3% over the period. That compares to, say, the S&P Supercomposite Trucking Index, which has dropped by 6.6%

Among the reasons for the relative strength in railroad shares: interest from value investors like Warren Buffett, and the fact that rising oil prices don't hurt this segment as much as other, more fuel-dependent industries.

Still, some might argue that at this point, much of the news, whether good or bad, is probably factored into prices. If you combine that with the fact that the railroad sector is back to long-term resistance levels relative to its trucking company counterpart, that suggests it might be a good idea to sell the former and buy the latter.

Otherwise, given a worrisome economic outlook and the relative underperformance of the transportation sector generally, it could be time for those who've been riding the rails to jump off the train -- before it runs out of track.

Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle.

Given investors anxiousness about the economy and hearing more gloom and doom than I think is warranted, I thought I would get back to basics with "my pal" Warren, and add to the series I started several months ago. I decided to write the series after receiving encouragement from friends and associates that read With Warren Buffett by my side ....

Today, I am writing about the concept of Durable Competitive Advantage, which is the ability to get ahead and stay ahead with a high level of certainty. It is also referred to as Sustainable Competitive Advantage.

To achieve a Durable Competitive Advantage, several factors have to be present. One is a big moat (Buffett expression) surrounding the enterprise. This usually means businesses that sell commodities where price is the primary factor in determining opportunity, have no moat as price takers. Their profit margins are not easily defendable. Another factor is barrier to entry. How easy would it be for someone to enter the same business and compete? The T-shirt business is a good example, of something without a Durable Competitive Advantage. Anyone could enter this business in one day, and they do. So unless the business has some unique concept, it does not have the promise of relatively predictable and sustainable profit margins in the future.

Large investors such as Warren Buffett and Carl Icahn, as well as hedge funds, have invested more than $8 billion in railroad stocks, calculating that strong business conditions for the rails will continue. But are they on the mark or late to the railroad party?

After a solid performance in 2006, Burlington Northern Santa Fe (NYSE: BNI), Union Pacific (NYSE: UNP) and Norfolk Southern (NYSE: NSC), are part of a sector that has gained 20% this year, despite a modest decline in traffic volumes (about 4%), to date.

The modest traffic dip - attributable primarily to the sluggish conditions in certain U.S. economic sectors - is not insignificant, analysts say. Still there are several long-term secular trends that suggest that the rail's recent strong run is far from over.

First, U.S. imports/exports remain strong: rails play a large role in transporting goods from and to coastal ports. Energy costs are driving part of this traffic increase: as diesel and gasoline prices rise, rail transport becomes a better transport value for many businesses/customers.

Second, commodity demand -- particularly in emerging-market and recently-developed countries -- is strong, and is expected to remain solid in 2007 and 2008, as the global economy continues to expand at a greater than 4% rate.

Further, the major U.S. rails are the survivors -- winners, really -- of a sector that scaled down and decreased the number of providers in the 1970s and 1980s. Translation: the rails
have a pricing power advantage with regard to many contracts and clients.

In Thursday afternoon trading, Burlington Northern gained 74 cents to $87.87, Union Pacific rose $1.06 to $118.81, and Norfolk Southern climbed 74 cents to $55.31.

To be sure, if the U.S. economy dips into a recession, or if the global economy slows dramatically, the investments by Buffett, Icahn, etc., would then look like riskier ventures, but so long as the secular trends remain in place, their calculation appears to be prudent, to say the least.