Cowen on GATX: For 3Q20, ‘Initial Positive Signs Emerge’ (UPDATED)

Written by Marybeth Luczak, Executive Editor
“With utilization remaining high at 98.2% (vs. our estimate of 97.7%), GATX beat our and consensus estimates, ex[cluding] items,” says Cowen and Company.

“With utilization remaining high at 98.2% (vs. our estimate of 97.7%), GATX beat our and consensus estimates, ex[cluding] items,” says Cowen and Company.

Chicago-based GATX Corp. reported third-quarter 2020 net income of $48.2 million, or $1.36 per diluted share, compared to net income of $37.2 million, or $1.03 per diluted share, in third-quarter 2019.

Following are more details, by the GATX rail business unit.

Rail North America

GATX reported a segment profit of $56.1 million in third-quarter 2020, compared to $60.9 million in third-quarter 2019. Lower segment profit was primarily a result of lower lease revenue, partially offset by higher gains on asset dispositions, according to the company. The wholly owned fleet comprised more than 118,100 cars, including some 14,750 boxcars, as of Sept. 30.

The following fleet statistics and performance data exclude the boxcar fleet. According to GATX, fleet utilization was 98.2% at the end of the third quarter, compared to 98.7% at the end of the prior quarter and 99.2% at the end of the third quarter of 2019. During the third quarter, the renewal lease rate change of the GATX Lease Price Index (LPI) was negative 29.4%. This compares to negative 28.0% in the prior quarter and negative 7.7% in the third quarter of 2019. The average lease renewal term for all cars included in the LPI during the third quarter was 29 months, compared to 31 months in the prior quarter and 40 months in the third quarter of 2019. Rail North America’s investment volume during the third quarter was $204.1 million.

GATX President and
CEO Brian A. Kenney

“Despite continued challenges in our markets, GATX performed well in the third quarter,” GATX President and CEO Brian A. Kenney said. “Rail North America’s fleet utilization remained high at 98.2% and our renewal success rate was 58.1% during the quarter. While absolute lease rates were flat to slightly higher for most car types compared to the second quarter, the North American railcar leasing market remains negatively affected by a persistent oversupply of railcars and weakness in certain markets—exacerbated by COVID-19’s economic impact. Consequently, GATX’s Lease Price Index was negative 29.4% during the third quarter. Despite higher fleet churn as a result of our lower renewal success, our maintenance cost performance was better than expected due to continued efficiency gains and lower than anticipated railroad and boxcar repairs during the quarter.”

Rail International

GATX reported that segment profit was $24.0 million in third-quarter 2020, compared to $19.9 million in third-quarter 2019. Higher segment profit was predominately driven by more railcars on lease. As of Sept. 30, GATX Rail Europe’s (GRE) fleet consisted of some 26,000 cars. Utilization was 98.2%, compared to 98.4% at the end of the prior quarter and 99.4% at the end of third-quarter 2019.

“Rail International continues to perform well,” Kenney said. “GATX Rail Europe’s fleet utilization remained high at 98.2% and renewal lease rates for most car types increased slightly versus the expiring rates. GATX Rail India’s fleet utilization is 100% and its fleet growth trajectory is resuming absent further COVID-19 disruptions.”

Portfolio Management

GATX reported that segment profit was $44.3 million in third-quarter 2020, compared to $10.7 million in third-quarter 2019. The company noted that “favorable results in the comparative periods were predominantly driven by higher remarketing income at the Rolls-Royce and Partners Finance affiliates, and in particular a large gain in the third quarter of 2020 from a transaction involving the refinancing and sale of a group of aircraft spare engines.”

Discontinued Operations

In the second quarter of 2020, GATX completed the sale of American Steamship Company (ASC). According to GATX, that segment is accounted for as discontinued operations; in third-quarter 2020, GATX recorded final post-closing adjustments of $0.3 million after-tax related to the sale.

More details can be found through GATX Investor Relations.

Cowen Insight

Cowen Transportation OEM Analyst and Vice President Equity Research Matt Elkott

“With utilization remaining high at 98.2% (vs our estimate of 97.7%), GATX beat our and consensus estimates, ex[cluding] items,” said Cowen Transportation OEM Analyst and Vice President Equity Research Matt Elkott. “While noting the challenging environment, management indicated that absolute lease rates were flat to slightly higher for most car types compared to 2Q. This could signal the beginning of the demand recovery we have discussed: 2021 is the Year of Railcar Demand Recovery.”

More insight from Cowen:

• “EPS, ex[cluding] unusual items, of $1.02 beat our and Street estimates of $0.86 and $0.92, respectively. NA LPI remained depressed at -29.4%, compared to our estimate of -30.0%. Average term was 29 months, compared to our estimate of 31 months.

• “The maintenance expense was ~5% below our estimate. This could be attributable in part to maintenance deferrals related to the current macro environment offsetting what would typically be a higher maintenance expense in an anemic demand environment that could cause returned cars to go to new customers.

• “Utilization remained strong at 98.2%, compared to our estimate of 97.7%.

• “The refinancing and sale of a group of spare aircraft engines reduces the company’s exposure to a market that is likely to remain very challenging for the foreseeable future.”

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