Investors Divided on Burlington’s Future

Burlington Northern Santa Fe Corporation (NYSE: BNI) is set to report earnings Thursday after-hours, but many investors don’t know what to expect. Competitors like CSX have beat expectations, but many remain skeptical on the industry’s outlook. Meanwhile, billionaire investor Warren Buffett continues to make bullish trades on the stock in a vote of confidence. This indecision is causing substantial volatility and pushing investors to extremes ahead of earnings tomorrow afternoon.

CSX Corporation reported strong earnings on Tuesday driven by a drop in energy costs and an effort to keep costs under control. Revenues increased 18% to nearly $3 billion while earnings per share from continuing operations skyrocketed 40% to $0.94 per share. Management pointed out that distributors are exploiting railroads to the advantage of their supply chains. This is good news in the short term with higher energy prices, but a macro slowdown could send shares lower in short order.

Warren Buffett’s Berkshire Hathaway also continues to sell puts against the large stock position that it has amassed in Burlington Northern Santa Fe. All of the puts carry an expiration of just two months after the sale. The strike prices are also getting lower to just $76 per share while the premium isn’t changing much. Buffett is basing the purchases on his famous motto: “Be fearful when others are being greedy, and be greedy when others are fearful.”

Many investors believe that Warren Buffett is helping to create a price floor at these levels and the move clearly demonstrates his confidence in the railroad. Investors looking to get involved in the upside without the cost of buying the expensive underlying shares may want to consider long-term LEAPS options. The January 2011 $80 calls are trading at just $17.30, which means investors can gain the right to purchase BNI shares anytime between now and January 2011 for just $1,840 per 100 shares.

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