Cowen on GATX: “We’re Raising our Estimates and Price Target”

Written by Andrew Corselli
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GATX Corp. reported first-quarter 2020 net income of $46.3 million, or $1.31 per diluted share, compared to net income of $41.5 million, or $1.12 per diluted share, in the first quarter of 2019.

Rail North America

Rail North America reported segment profit of $72 million in 1Q20, compared to $68.4 million in 1Q19. Higher segment profit was primarily a result of higher gains on asset dispositions, partially offset by lower lease revenue. At March 31, 2020, Rail North America’s wholly owned fleet was comprised of approximately 117,600 cars, including more than 15,000 boxcars.

The following fleet statistics and performance discussion exclude the boxcar fleet. Fleet utilization was 99.0% at the end of 1Q20, compared to 99.3% at the end of the prior quarter and 99.4% at the end of 1Q19. During the first quarter, the renewal lease rate change of the GATX Lease Price Index (LPI) was negative 11.6%. This compares to negative 9.1% in the prior quarter and positive 5.2% in 1Q19. The average lease renewal term for all cars included in the LPI during the first quarter was 31 months, compared to 37 months in the prior quarter and 39 months in the first quarter of 2019. Rail North America’s investment volume during the first quarter was $110.9 million.

Rail International

Rail International’s segment profit was $13.9 million in 1Q20, compared to $14.8 million in 1Q19. Higher lease revenue in 2020, due to more cars on lease, was more than offset by changes in foreign currency exchange rates, resulting in lower segment profit. At March 31, 2020, GATX Rail Europe’s (GRE) fleet consisted of approximately 25,400 cars. Utilization was 98.5%, compared to 99.3% at the end of the prior quarter and 98.9% at the end of 1Q19.

Portfolio Management

Portfolio Management reported segment profit of $19.5 million in 1Q20, compared to $12.3 million in 1Q19. The increase in segment profit is primarily attributable to strong performance at the Rolls-Royce and Partners Finance affiliates.

American Steamship Company

American Steamship Company (ASC) reported segment profit of $0.9 million in 1Q20, compared to $2.5 million in 1Q19. ASC’s operations were limited during the first quarter as the vessels were in winter lay-up from mid-January through late March.

“On Feb. 7, 2020, we entered into an agreement to sell ASC. The sale is subject to customary closing conditions.”

“GATX posted solid first-quarter results despite continuing weakness in the North American railcar leasing market and a deteriorating global economy,” said Brian A. Kenney, President and CEO, GATX. “During this unprecedented time, our focus has been on ensuring the health and safety of our global workforce and serving our customers with minimal disruptions.

“Rail North America’s performance in the quarter was generally consistent with our expectations coming into 2020. We achieved fleet utilization of 99% at the end of the quarter and a renewal success rate of 74.6%. The renewal lease rate change of GATX’s Lease Price Index was negative 11.6% in the quarter, with an average renewal term of 31 months.

“Rail International performed as expected. Fleet utilization at GATX Rail Europe remains high at 98.5% at quarter end, and GATX Rail India grew its fleet to over 3,900 railcars while maintaining utilization at 100%. Within Portfolio Management, our Rolls-Royce and Partners Finance affiliates produced favorable results, despite an unprecedented drop in commercial air travel in the latter part of the quarter. Finally, American Steamship Company’s sailing season began at the end of March with seven of the planned 11 vessels currently deployed in anticipation of lower tonnage due to COVID-19 impacts. The sale of American Steamship Company is expected to close in the second quarter.”

“While the impact of the COVID-19 pandemic on our first-quarter results was limited,” Kenney said, “we expect future operating results to be negatively impacted, the magnitude of which is highly uncertain and depends on many factors that continue to evolve rapidly, including the scope and duration of the pandemic’s disruptions and the shape and timing of the eventual recovery. Accordingly, we are suspending our previously announced full-year 2020 guidance.

“I am grateful for the dedication and resilience of our employees in the face of the current obstacles. The challenges posed by the COVID-19 pandemic are extraordinary and unparalleled. However, GATX has managed through a number of crises and economic cycles during its 120-plus-year history. We entered the current crisis with a strong balance sheet, excellent liquidity and committed long-term leases that provide a source of stable cash flows—all of which we expect positions GATX to navigate through this difficult period and capitalize on attractive investment opportunities that may arise.”

Cowen Insight

“Effective navigation of the leasing cycle, relative insulation by lease terms, our view that JV headwinds are well-documented, and the fact that about 80% of GATX is owned by its top-10, long-term-oriented shareholders could make the stock relatively less volatile within the rail equipment space during recessionary conditions,” said Cowen analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer. “We’re raising our estimates and price target.

“We are raising our 2020 EPS estimate to $3.85, from $3.40, in order to reflect the 1Q20 beat ($1.31 vs. our estimate of $1.02) and a modestly better outlook for the remainder of the year than we had expected in our April 15 industry preview, Positioning, Estimate Revisions, and Financial Health Checks. We are also raising our 2021 EPS estimate to $4.20, from $4.10. Our price target rises from $62 to $65 based on our new 2021 EPS estimate and a 15.5x multiple, up half a turn from our previous multiple in order to reflect the company’s solid execution during the downturn so far, as well as somewhat less dire market conditions than we previously expected.

“We rate GATX Market Perform based on what we see as largely fair valuation at current levels. That said, concerns about the aircraft spare engine business—which had been expected prior to the COVID-19 crisis to have an outsized contribution to earnings this year—are well-documented, in our opinion; and the company’s railcar leasing business is somewhat protected by lease terms. GATX’s average lease renewal term in 1Q20 was 31 months. The number of railcars scheduled for renewal in 2020 is about 18,000, and we would expect a similar number in 2021. The renewal success rate in 1Q20 was a solid 74.6% and remains north of 60%, a good percentage relative to prior downturns. Additionally, cars that are not being renewed are generally going back out with customers. This should limit the fleet utilization decline, which we now project to end the year at 96.8%, down from 99.3% at the end of 2019.

“One potential silver lining of a recession is the possible emergence of fleet investment opportunities. This is as some fleet owners, already battered by Precision Scheduled Railroading and rail traffic declines in 2019, may question the viability of their businesses during and after the COVID-19 downturn. GATX, which has historically been an effective buyer, appears ready to consider transactions large and small.

“With Wells Fargo (which owns the largest railcar lease fleet in North America at about 180,000 units) under a fairly new CEO, its railcar fleet, long thought to be for sale, could go on the market again. Trinity and GATX may be interested in big parts of the fleet at the right valuations.”

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