Railroads’ capital expenditure in 3Q16
Here we’ll go through the capital investments of the major railroads in 2016. Investors should understand that railroads consume more capital than the trucking (JBHT) industry. The investment in tracks and rolling assets is far higher for railroads. Higher capital expenditure suggests more business confidence in an era of weak railroad industry fundamentals.
Railroads’ capital investment in 3Q16
Capital expenditure is usually expressed as a percentage of revenues in the railroad industry. This major expenditure is mainly divided into three categories:
- maintenance capital expenditure
- growth capital expenditure
Normally maintenance capital expenditure accounts for nearly half of a railroad’s overall capital expenditure. This expenditure is related to rail tracks replacement and upgrades. In contrast, growth capex has to do with investment in new locomotives and railcars.
Trend in railroads’ capital expenditure
The above graph shows the front runners in terms of capital expenditure as a percentage of revenue. Among the major railroads, Kansas City Southern (KSU) and Canadian National Railway (CNI) have the highest capital expenditure as a percentage of revenue. A clear trend of decline in capex in the first nine months of 2016 from the corresponding period in 2015 is evident from the above graph.
You should note that CNI remains the only railroad among the peer group where capital expenditure based on revenue has actually risen in the first nine months of 2016. Much of the increase in the company’s capex was attributed to the purchase of rolling stock. However, the expenditure on track and roadway was less in the first nine months of 2016 for CNI.
Investors are reminded that in the uncertain freight volumes environment, many railroads revised their 2016 capital investments downward. Railroads such as Norfolk Southern (NSC), CSX (CSX) and BNSF Railway (BRK-B) have cut their spending on new locomotives and freight cars. BNSF announced a ~15% reduction in 2016 capital spending earlier this year.
The US’s largest short-line operator, Genesee & Wyoming (GWR), recorded the highest decline in capital expenditure of 7.9% in the first nine months of 2016. The loss of mining customers in Australia prompted the company to lower capital spending. However, GWR has been expanding its global presence since significant acquisitions of short line railroads.
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In the next part, we’ll go through the debt levels of these major railroads in the US.