“Stupid.”

That’s what Buffett’s right-hand man Charlie Munger had to say about not investing in railroads sooner.

That was two years ago. Berkshire Hathaway (NYSE: BRK-B) now has a stake in three of the four major railroads in the United States. But he is so fond of one, he owns about 20% of the company.

Luckily, it’s not too late for investors to jump on board with Buffett. The railroad is still trading at about the same price as when the Oracle of Omaha first bought the shares.

More importantly, everything Buffett loves about this investment is still intact. He even bought an additional 4.3 million shares earlier this year. And it’s not that Buffett is bullish on everything right now, he has been cutting his stake in other holdings, like Moody’s (NYSE: MCO).

There are only three other major railroads in the U.S.; Burlington Northern (NYSE: BNI) and Union Pacific (NYSE: UNP) operate in the West and Midwest, while CSX (NYSE: CSX) and Norfolk Southern (NYSE: NSC) operate in the East.

#-ad_banner-#Don’t expect new competitors to enter the mix anytime soon. It’s extremely expensive to build new tracks, to say nothing of navigating past the many regulatory obstacles. This gives the industry a wide economic moat to protect its profits, something Buffett demands of his investments.

Rail also has an advantage over other forms of land transportation. Rail is less expensive than trucks over long distances — three times more fuel-efficient per ton shipped. The long-term future for rail is bright, the U.S. Department of Transportation projects that demand for rail will increase nearly +90% by 2035.

But even with little competition, the past year has been tough on the railroads. The recession reduced demand for many products. Less demand meant fewer products were produced and, thus, transported.

Out of the four major railroad operators, one stands out for navigating the downturn best. It also happens to be the company Buffett has a 20% stake in, it’s Burlington Northern (NYSE: BNI). Burlington is the second-largest railroad, with more than 32,000 miles of track in 28 states.

Here’s how Burlington stacks up against its competitors.

Company (Ticker)	2Q Net Earnings 2008	2Q Net Earnings 2009	Year-Over-Year Growth
Burlington Northern (NYSE: BNI)	$350M	$404M	+15.4%
Union Pacific (NYSE: UNP)	$531M	$468M	-11.8%
CSX (NYSE: CSX)	$385M	$308M	-20.0%
Norfolk (NYSE: NSC)	$453M	$247M	-45.5%

The +15% jump in net income is impressive amid tough economic conditions. One of the reasons for Burlington’s success is its ability to cut expenses better than any of its rivals. It managed to cut
operating expenses by a staggering -33%.

Burlington is also fortunate to have major railroads in a region known as the Powder River Basin. Coal production is less cyclical than most businesses since it’s used to generate more than half of the electricity in this country, which helped shield 30% of Burlington’s revenue that stems from coal transportation. Coal revenues were down -3% in the second quarter from the year-ago period, compared with -34% for consumer products.

Burlington is also in good position to benefit from trade with China. Imports and exports usually enter or leave through California. Most of the trades between the two countries ends up on a BNI or UNP train because theP/E6 network of rails are concentrated in the West. From 2003 to 2008 trade between China and the United States more than doubled.

Business is starting to pick up for the rails. The Association of American Railroads reported Wednesday that average weekly container units in September were the highest since November of last year. This is a great indication that things are getting better for the industry.

Burlington’s shares are up almost +5% on Wednesday’s news. I expect the shares to continue to move up as investors become more confident in the economy and more good news trickles in from the industry.

Here’s a look at the 10-year total return of the four major railroads.

Company (Ticker)	10-Year Total Return
Burlington Northern (NYSE: BNI)	+198%
Union Pacific (NYSE: UNP)	+142%
CSX (NYSE: CSX)	+112%
Norfolk (NYSE: NSC)	+150%

BNI has shown its resilience during the downturn and its ability to outperform in the long-term. Investors who want to invest alongside Buffett should consider adding shares of Burlington now, while some uncertainty about the economic recovery remains.