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How Canadian National Railway is Leveraged against Its Peer Group

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Financial leverage

Investors wishing to invest in railroads should pay heed to the railroad’s debt levels. Railroads such as Canadian National (CNI) engage in a highly capital-absorbing industry. High levels of debt can put a burden on the cash inflows and negatively impact a railroad’s credit ratings.

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Debt profile

Looking at the above graph, you will notice that CNI has broadened its capital base in recent years. The company operates on the back of a strong balance sheet. It has utilized capital for investments in infrastructure and dividend improvement. CNI’s total assets increased by $4.7 billion Canadian in 2015 to $36.4 billion Canadian. The increase was mainly due to higher net properties of $4.1 billion Canadian, resulting from systematic capital spending.

The company’s equity and liabilities base expanded due to incremental total debt of $2.0 billion Canadian, ~$1.5 billion Canadian in net profits, and $1.3 billion Canadian in higher deferred income taxes mainly associated with accelerated tax depreciation.

In 2016, Canadian National’s debt maturities are pegged at $1.4 billion Canadian. However, the company expects fewer maturities compared with 2016 for the next three years. CNI’s increased debt levels are reflected in its capital commitments for 2016. From 2010 onward, the company has successfully traded on equity, which means using external funds to improve earnings on common stock.

Peer group status

The current economic situation is not supportive of the railroad industry as a whole. Investors’ concerns about CNI’s debt levels are reflected from the sharp fall in market capitalization as a percentage of enterprise value in 2015. We’ll compare Canadian National with its Class I industry peers in terms of debt-to-equity ratio.

  • Norfolk Southern (NSC): 82.8%
  • CSX Corporation (CSX): 91.7%
  • Kansas City Southern (KSU): 56.8%
  • Genesee & Wyoming (GWR): 68.2%
  • Canadian Pacific Railway (CP): 186.7%

If you are looking for US-specific railroad stocks, the SPDR S&P Transportation ETF (XTN) holds 2.97% in GWR and invests 10.36% in the US Class I railroads.

In the next part, we will go through the share price performance of Canadian National and returns to shareholders.

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