How Do Major US Railroads’ Debt Positions Look?
In this part, we’ll review the debt levels of the major US railroads due to the capital-intensive nature of the business. US railroads heavily invest in locomotives, rolling stock, new tracks, and other rail assets.
Investors should closely watch their leverage levels, particularly amid weak freight volume environments. The railroad industry is a cyclical industry. During times of prosperity, high debt supports growth. However, with economic downturns, debt becomes a burden. Higher interest expenses affect net earnings and negatively affect the per share earnings.
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Net-debt-to-forward EBITDA multiple
Net debt is derived by deducting the cash and equivalents from a company’s total debt. The net debt denotes the amount payable by a company to lenders. EBITDA (earnings before interest, tax, depreciation, and amortization) refers to earnings from core operations.
The net-debt-to-forward EBITDA ratio indicates the debt servicing capacity of a company through EBITDA. Since BNSF Railway (BRK-B) is privately owned by Berkshire Hathaway, it hasn’t been considered for discussion.
The above graph shows the debt servicing ability of the major US railroads. The multiple is the highest for the US’s largest short line operator, Genesee & Wyoming (GWR). This non-Class I railroad has the highest net-debt-to-forward EBITDA multiple of 3.4x in its peer group. As discussed earlier, GWR extensively engages in acquisitions of smaller railroads worldwide. In fact, it is the only major US railroad with operations in Europe and Australia.
Next comes Calgary-headquartered Canadian Pacific Railway (CP), which has a multiple of 2.4x. In the last one year, CP has effectively brought down its total debt to $8.4 billion Canadian dollars. Major Eastern US railroads such as Norfolk Southern (NSC) and CSX (CSX) have net-debt-to-forward EBITDA multiples of 2.1x and 2x, respectively.
Western US mammoth freight rail carrier Union Pacific (UNP) has the lowest multiple of 1.43x in the peer group. UNP has cash and cash equivalents of around $1.4 billion, the highest among all the major US railroads. Canada’s largest freight rail, Canadian National Railway (CNI), has a ratio of 1.5x, the second lowest in the group.
The iShares Core S&P 500 ETF (IVV) is a growth ETF related to the Standard & Poor’s 500 Index. IVV includes all the US-originated Class I railroads in its portfolio.
In the coming part, we’ll focus on cash returned by these railroads.