Why Genesee & Wyoming’s Debt Levels Are the Industry’s Highest
Why Genesee & Wyoming Has Taken a Dive these Last 12 Months
GWR’s debt levels
Genesee & Wyoming’s (GWR) $761.0 million Freightliner acquisition was 100% debt financed. The company raised $650.0 million from the issue of the term loan. The balance was funded through a drawdown from an existing revolver. The company had a total debt of $2.3 billion on its books at the end of December 2015.
In February 2015, GWR expected Freightliner to contribute $785.0 million in revenues and a $93.0 million EBITDA (earnings before interest tax, depreciation, and amortization) in the latter’s first year of operation. Freightliner followed an April–March financial year.
Actual versus predicted
Genesee & Wyoming (GWR) expected $28.0 million in depreciation and amortization expenses from Freightliner in the latter’s first year. That translated into a yearly operating income of $65.0 million from Freightliner.
On a pro-rata basis, for the year ended December 31, 2015, Freightliner should have contributed $589.0 million in revenues and $49.0 million in operating income. However, in reality, its revenue contribution was $531.3 million and the operating income was $33.4 million.
According to the company’s press release in February 2015, “The expected free cash flow generation of the combined business is anticipated to de-lever G&W to approximately 3.0x debt/EBITDA by the end of 2015.” In reality, it came in at 3.9x.
High leverage in the industry
Genesee & Wyoming’s leverage rose more than two-fold at the time of the acquisition of RailAmerica in 2012. However, it brought it down to manageable levels in 2013. The point is, present debt levels when looked from a revenue angle, pose a worrying picture. Against a revenue of $2.0 billion, the company has a total debt of $2.3 billion. The only major railroad in the same situation is Canadian Pacific (CP).
In the current circumstance in which railroads are struggling to grow their core earnings, a debt-to-EBITDA ratio of 3.9x is certainly not welcome. We’ll compare the total debt-to-EBITDA levels for GWR’s peers:
Norfolk Southern (NSC): 5x
CSX Corporation (CSX): 2.2x
Union Pacific Corporation (UNP): 1.4x
Kansas City Southern (KSU): 2x
Canadian Pacific Railway (CP): 8x
Canadian National Railway (CNI): 6x
Investors who prefer a pure play in the transportation sector can opt for the iShares US Industrials ETF (IYJ). This ETF holds ~1.6% and ~5.2% in major trucking companies and railroads, respectively.
In the final part of this series, we’ll assess Genesee & Wyoming’s valuation against the US Class I railroads.
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