WARREN BUFFETT ENDED THE

suspense, disclosing in an SEC filing that one of the mystery companies in which he's been accumulating shares is

Burlington Northern Santa Fe

Deere

Caterpillar

for him a few weeks ago, I can readily understand his reasoning, and it's not far off from the thinking that led me to the equipment makers.

Burlington certainly fits Buffett's stated profile. It's:

Of course these are characteristics shared by numerous large-cap companies. I suspect other criteria embraced by Buffett were similar to ones that influenced my thinking on Deere and Caterpillar namely, that there aren't many competitors (after years of consolidation, railroads are pretty much an oligopoly) and large economies of scale which deter new competitors. Buffett has shown his fondness for oligopolies (and aversion to price competition) with his investments in Coca-Cola and Anheuser-Busch. Deere and Caterpillar also operate in markets with similar structures. Burlington doesn't quite boast the brand names that Caterpillar and Deere have, but both Burlington and Santa Fe have been around a long time and have wide recognition. (Footnote to history: Burlington began as the Chicago, Burlington and Quincy, or CB&Q the latter being my hometown.)

What I really like about the Burlington choice, however, is the potential for growth based on long-term trends, specifically high energy costs and growth in the agricultural sector, both of which I've mentioned in this column. Buffett has a ringside seat for both, given his headquarters in Omaha in the heart of the corn belt. Railroads are both an energy-efficient method of transport and they haul the two biggest oil alternatives, coal and corn (and other agricultural products).

Railroads' main source of competition is the trucking industry, which has had limited pricing power thanks to high fuel costs, much of which they pass on to their customers. Burlington's net profit margins were at 12.5% last year, as high gas prices worked their way through the system. Even a small further increase would yield impressive results on the bottom line.

Burlington Northern's route system is well positioned to capitalize on the surge in corn production expected this year. That could lead to further revenue gains, which also fall impressively to the bottom line given the railroads' high fixed costs and economies of scale. Yet Burlington trades at a price-to-earnings ratio of just under 15 (based on 2007 estimates).

What's not to like? Many analysts have been fretting about the housing slowdown and a decline in lumber shipments. Others have worried that Burlington in particular and railroads in general are cyclical and that the economy is due to turn against it (they make the same arguments about DE and CAT). To me, that's missing the forest for the trees.

Railroads may be the embodiment of a "mature" industry, given how long they've been around. You're not going to find the dazzle and sizzle or explosive growth of a technology start-up, but that's not sustainable long-term nor is it the kind of company Buffett looks for. I think the Oracle is onto something here, and that this is an investment worth piggy-backing. Burlington Northern stock jumped on news of Buffett's interest, so I'd let the excitement cool off before buying. Other railroads to consider are CSX, Kansas City Southern, Norfolk Southern and Union Pacific, one of which may be Buffett's other target.