US railroads: Q1 capex
In the previous part of this series, we looked at operating cash flow levels for the major US railroads. In this part, we’ll take a look at their capital expenditures in the first quarter. US railroads mainly incur capex on track maintenance, replacement, and expansion. Maintenance capex accounts for up to 50% of total capex. Growth capex denotes a railroad’s investment in new railcars and locomotives.
With the passage of the Tax Cuts and Jobs Act, transportation (XTN) stocks have rebounded. That’s due to the provision that allows 100% expensing of qualified capex in the year it is incurred. The prime objective of the act is to induce companies to invest their tax savings back into the business. That, in turn, is expected to generate employment. Railroads that are confident in their near-term business prospects are most likely to shell out more on growth capex, which is always expressed as a percentage of revenue. Let’s check out the railroads’ capex trends in 2018.
Railroads with the highest capex-to-revenue ratios
As you can see in the above graph, it’s clear that the smallest Class I railroad, Kansas City Southern (KSU), has the highest capex-to-revenue ratio of 19% in the first quarter. However, on a YoY (year-over-year) basis, it has gone down 7.3% from a robust 26.3% in Q1 2017. That indicates that it substantially reduced its capex in the first quarter.
KSU is followed by Western US rail giant Union Pacific (UNP), for which the same metric is 16.8%. What differentiates UNP is the fact that it has upped its capex-to-revenue ratio in the first quarter by 0.8%, from 15.8% in Q1 2017. Canadian Pacific Railway’s (CP) capex-to-revenue ratio is the third-highest in the peer group. Its metric has gone up marginally from 14.3% to 14.5% in the first quarter.
The capex-to-revenue ratio for Eastern US rail carrier Norfolk Southern (NSC) is 14.1% for the first quarter, from 17.1% in Q1 2017. It has gone down 2.9%. Canadian National Railway’s (CNI) capex-to-revenue ratio has gone up 1% to 13.3% in the first quarter, from 12.3% in Q1 2017. CSX’s (CSX) metric fell 12.8% in the first quarter, from 15.4% in Q1 2017.
BNSF (Burlington Northern Santa Fe) Railway’s (BRK.B) metric declined 3% to 10% in the first quarter, from 13% in Q1 2017. Since Genesee & Wyoming (GWR) primarily expands through inorganic growth, its capex-to-revenue ratio of 10% is the lowest in the peer group, along with BNSF.
Now let’s turn to these railroads’ balance sheets by examining their debt levels.