Railroads’ 3Q16 operating margins
Previously, we looked into the volume changes of major US railroads in 3Q16. Now, we’ll go through railroads’ major focus area: operating margins. The 3Q16 operating margin for Norfolk Southern (NSC) was 32.5%, up 220 basis points from 30.3% in 3Q15. Though the company’s revenues fell 7% in 3Q16, the operating expenses fell 10% during the same time.
CSX’s (CSX) operating margins fell 0.7% on a year-over-year basis, settling at 31.0% in 3Q16. This was mainly due to the fact that CSX’s 8% decline in revenues was higher than the fall of 6.8% in operating expenses in the reported quarter compared with 3Q15.
Operating margins of Western US railroads
In the Western US, dominant carrier Union Pacific (UNP) saw its 3Q16 operating margins falling by 100 basis points to 35.9%. The major reason behind UNP’s decline in operating margins was a 7% decline in revenue. However, the company’s operating margin in 3Q16 fell 9.6%. This reflects the pricing pressure on UNP in spite of realizing productivity gains.
In 3Q16, Burlington Northern Santa Fe’s (or BNSF) operating margin was 36.4%, down 0.9% from 37.3% in 3Q15. BNSF’s revenues in the same quarter fell 7.7%. On the other hand, operating expenses fell 6.4%. It seems that this Berkshire Hathaway controlled US Class I railroad was able to maintain its overall pricing apart from margin improvement drives.
Operating margins of Canadian railroads
For Canada’s largest freight rail, Canadian National (CNI), the 3Q16 operating margin was 30 basis points higher at 46.5% on a year-over-year basis. The revenues fell 6%, whereas the operating expenses tanked by 7.4% on a year-over-year basis.
Canadian Pacific (CP) also recorded an 180-basis-point erosion in operating margins at 42.3% in 3Q16. The company was able to reduce its operating expenses by 6.2% against a 9% decline in revenues in 3Q16, which represents a volume loss impacting any efficiency gains realized by CP in 3Q16.
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.
In the next part, we’ll go through the cash flows of these railroads.