Railroads’ capital expenditure is based on their revenue. Higher capex may mean a railroad is confident about its future business outlook. Approximately 50%–60% of railroads’ capital expenditure goes toward maintaining freight cars, tracks, locomotives, bridges, tunnels, and other infrastructure and equipment. In 2017, ~19% of US railroads’ (IYJ) revenue had gone toward capex in the last ten years, while 3% of the average US manufacturer’s revenue had gone toward capex.
KSU put 20.2% of its revenue toward capex
In the first six months of 2018, Kansas City Southern, the smallest US Class I railroad, put the most toward capital expenditure as a percentage of revenue. During the period, 20.2% of KSU’s revenue went toward capital expenditure. Notably, in the first half of 2017, KSU’s capex-to-revenue ratio of 22.5% was also the highest among major US railroads.
CP ranks second
Canadian Pacific Railway’s (CP) capex-to-revenue ratio of 19.2% was the second highest in the first half of 2018, rising YoY from 17.8%. CP’s competitor, Canadian National Railway (CNI), had the third-highest ratio of 18.5%. Its ratio was 16.4% in H1 2017.
BNSF Railway’s (BRK.B) capex-to-revenue ratio was 11.3%, the lowest among all Class I railroads in the first half of 2018. BNSF’s ratio was 13.3% in H1 2017. Union Pacific (UNP) had the second lowest capex-to-revenue ratio among Class I railroads, of 14.5%. It was 15.3% in the same period last year.
Free cash flow and capital-to-revenue ratios are important metrics for determining railroads’ future business growth. Considering both metrics, investors should keep a close watch on Kansas City Southern, Canadian Pacific Railway, and Canadian National Railway in future months.