“Stellar” GATX quarter good sign for industry

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An improving U.S. rail market helped second-quarter earnings at GATX Corp., despite industry-wide railcar oversupply and pressure on car lease rates.

Chicago-based GATX Corp. reported revenue of $349.5 million for the quarter ended June 30, up from $348.4 a year ago. Net income of $38.8 million or $1.01 per diluted share compared to net income of $53.4 million or $1.35 per diluted share in the second quarter of 2017.

Net income for the first six months of 2018 was $115.1 million or $2.99 per diluted share, compared to $110.9 million or $2.79 per diluted share in the prior year period.

The company said the 2018 second quarter and year-to-date results include a net negative impact of $5.8 million or $0.15 per diluted share, attributed to costs associated with the closure of a railcar maintenance facility in Germany. The 2017 second quarter and year-to-date results include net gains of approximately $1.1 million or $0.03 per diluted share, associated with the planned exit of the majority of Portfolio Management’s marine investments.

“Rail North America experienced a more favorable industry environment in the second quarter, as railroad car loadings increased and railroad velocity decreased relative to 2017,” said Brian A. Kenney, GATX president and chief executive. “Although lease revenue remains under pressure due to continued railcar oversupply and a large railcar manufacturing backlog, Rail North America continues to perform extremely well. Fleet utilization was 98.9% at quarter end, the renewal success rate was 78.6% during the quarter, absolute lease rates increased across the fleet and costs remain under control. The renewal lease rate change for GATX’s Lease Price Index was negative 16.1% in the second quarter with an average renewal term of 41 months.

Kenney said the Rail International segment “is performing very well. In Europe, we are seeing gradual, broad improvement across the chemical, petroleum, and freight markets. As a result, utilization at GATX Rail Europe increased to 97.8% at quarter end. In India, customer demand for new railcar leases is gaining momentum, and total investment volume for 2018 will be strong.

“Rolls-Royce and Partners Finance affiliates’ performance continues to drive solid results within the Portfolio Management segment. American Steamship Company successfully deployed 10 vessels into service and is seeing increased demand for its services.”

The company expects 2018 full-year earnings to be in the range of $4.90 to $5.10 per diluted share, excluding the impact of the German railcar maintenance facility closure.

Rail North America reported segment profit of $64.2 million in the second quarter of 2018, compared to $74.9 million in the second quarter of 2017. Lower segment profit was a result of lower lease revenues and lower gains on asset dispositions. Year-to-date, Rail North America reported segment profit of $173.1 million, compared to $167.9 million in the same period of 2017. Lower revenues in 2018 were more than offset by higher gains on asset dispositions in 2018, resulting in slightly higher segment profit.

As of June 30, Rail North America’s wholly-owned fleet comprised approximately 119,000 railcars, including approximately 16,000 boxcars. Excluding boxcars, fleet utilization was 98.9% at the end of the second quarter, compared to 98.2% at the end of the prior quarter and 98.8% at the end of the second quarter of 2017. During the second quarter of 2018, the renewal lease rate change of the GATX Lease Price Index (LPI) was -16.1%. This compares to -11.6% in the prior quarter and -21.4% in the second quarter of 2017. The average lease renewal term for cars included in the LPI during the second quarter was 41 months, compared to 34 months in the prior quarter and 32 months in the second quarter of 2017. Rail North America’s investment volume during the second quarter was $149.1 million.

Rail International’s segment profit was $12.8 million in the second quarter of 2018 compared to $16.6 million in the second quarter of 2017. Segment profit of $31.8 million year-to-date 2018 compared to $30 million for the same period of 2017. The second quarter and year-to-date 2018 results include $8.6 million of expense ($5.8 million after-tax) related to the closure of GATX Rail Europe’s (GRE) railcar maintenance facility in Germany. Favorable results in the comparative periods were driven by more railcars on lease and foreign exchange impacts.

As of June 30, GRE’s fleet consisted of approximately 23,100 cars and utilization was 97.8%, compared to 96.7% at the end of the prior quarter and 95.7% at the end of the second quarter of 2017.

Portfolio Management reported segment profit of $11.4 million in the second quarter of 2018, compared to $19.8 million in the second quarter of 2017. Segment profit year-to-date 2018 was $25.3 million, compared to $34.5 million for the same period of 2017. The decline in segment profit in the second quarter and year-to-date was predominantly driven by lower residual sharing fees. Second quarter and year-to-date 2017 segment profit also includes a net pre-tax gain of approximately $1.8 million ($1.1 million after-tax) associated with the planned exit of the majority of the marine investments.

Calling GATX earnings a “stellar result” in a note to investors, Cowen & Co. analyst Matt Elkott wrote, “GATX beat our and consensus estimates top to bottom. The company raised the guidance range, with the new midpoint 7.5% above the prior one. LPI, average term, and absolute lease rates improved, likely signaling a continuation of more favorable railcar demand trends. The stock should be up materially on the results and could drive other rail equipment stocks.

“EPS from continuing operations of $1.16 beat our and the Thomson consensus estimates of $0.97 and $0.92, respectively. Revenue of $349.5M was also above our and Street expectations of $341.2M and $339.9 M, respectively.

“LPI was -16%, better than our estimate of -25%. The company had mentioned on its 1Q18 call that it continued to expect its full year LPI to be at least -25% despite a marked deceleration in that quarter. We now see upside to that commentary.

“GATX’s fleet utilization remained strong, improving to 98.9% (98.2% in 1Q18 and 4Q17).

“We are encouraged by GATX’s continued strong execution and have high confidence in management’s ability to manage throughout the cycle. The results should be well-received, leading to material stock price outperformance. This should also drive other rail equipment stocks, where Cowen has an Outperform rating for Trinity Industries, Greenbrier Cos., American Railcar Industries, and Wabtec Corp.

“We believe railcar demand continues to be on the rebound, a view most recently reinforced earlier this week with channel checks we conducted at the Midwest Association of Rail Shippers conference we attended. However, increasing orders for newly-built railcars with the manufacturers pose a risk of overbuilding for the industry, which could be detrimental for lease rates in the long term.

Elkott added that Cowen’s estimates and target price “are under review”.