This US Railroad Saw the Most Growth in Operating Cash Flows
Railroads’ operating cash flows
After going through the US railroads’ operating margins in 2Q17, we’ll consider their operating cash flows. Operating cash flows determine the extent of prospective returns to shareholders in the form of buybacks and dividends. Plus, it is also a deciding factor for the level of a railroad’s capital expenditure.
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Operating cash-flows-to-revenues ratio
For the purpose of this analysis, we have used the operating-cash-flows-to-revenue metric. This ratio compares the operating cash flows of a US railroad to its revenues. The ratio provides a window to investors to evaluate a railroad’s ability to generate cash from its revenues. If the operating cash flows don’t grow with expansion in revenues, it most likely reflects inefficiencies in the management of trade receivables or change in terms of revenues.
The top US railroad in OCF to revenues
The graph above suggests that Canadian National Railway (CNI) has the highest ratio of operating cash flows to revenues. CNI’s ratio rose 2% in 1H17, which indicates better working capital management. It’s immediately followed by Union Pacific (UNP) in terms of higher ratios. However, UNP’s ratio fell 3.8% to 35.7% in the first half of 2017 compared with the same period a year before.
UNP’s arch rival BNSF Railway (BRK-B) ranked third in the peer group with a 33.9% operating-cash-flows-to-revenues ratio in 1H17. The same was 31.7% in 1H16, indicating improvement in the current year. In 2017, Kansas City Southern’s (KSU) ratio was 32.9%, reflecting a deterioration of 4% compared with 37% in 1H16.
Virginia-headquartered Norfolk Southern (NSC) has a 30.2% operating-cash-flows-to-revenues ratio in 1H17. The company reported a slight improvement in the ratio compared with the first half of 2016. Compared with arch rival CSX (CSX), NSC had a better ratio in 1H17. In fact, this ratio for CSX has fallen ~3% in 1H17.
Genesee & Wyoming (GWR) has the lowest operating cash-flows-to-revenues ratio in its peer group. However, the same has improved 4.7% to 21.2% in 1H17 for the company.
Investing in ETFs
The iShares Core S&P 500 ETF (IVV) is a growth ETF related to the Standard & Poor’s 500 Index. All the US originated Class I railroads are included in IVV’s holdings.
In the next article, we’ll turn to the crucial factor in railroads’ top-line growth, capital expenditure.