GATX Corporation Stock: Not A Great Ride To Take (NYSE:GATX)

Ever since I was a little kid, I loved railroads. I can’t say exactly why. However, I do know that I love them as a means of transportation, particularly when it comes to goods. Although in the US, it may seem as though travel by rail is a small part of our everyday lives, it’s actually a very big part. About 28% of all US freight movement, as measured by ton miles, are transported by rail. This number increases to 40% when talking about long distance freight volume. This dwarfs any other mode of transportation for goods.

Even though transporting individual items by rail might be cheap, the industry as a whole is very asset intensive. And companies, looking for ways to optimize their own operations, often look for opportunities to decrease capital outlays for assets. This has led to a rather sizable railcar leasing market throughout the US. Similar markets exist in other countries, such as India and many parts of Europe. Here at home, the advantages of leasing railcars, which include certain tax benefits, lower capital outlays, and greater flexibility, resulted in over 60% of all railcars in North America being leased from other parties.

One company that participates in this as an owner of railcars is GATX Corporation (NYSE:GATX). In recent years, the company has done well to grow its revenue. Profits and cash flows have also risen at the same time. And in the long run, it’s likely this trend will continue. Having said that, shares don’t look particularly cheap. If anything, they strike me as being fairly valued. Because of this, I’ve decided to rate the company a ‘hold’ for now. But if the stock does get cheaper or fundamentals improve, my mind set on the matter could change for the better.

An interesting firm

As of the end of the first quarter of the 2024 fiscal year, GATX Corporation owns a massive fleet of railcars totaling 150,229 in all. The largest chunk of these, 111,357, or 74.1%, of the railcars the company owns are focused under its Rail North America segment that, unsurprisingly, handles its operations here at home. Because this data just came out and management has not come out with more, we only know the composition by railcar type when looking at the end of 2023. For that time, the company had 148,499 railcars in its fleet. When it comes to the operations in North America, 62,227 were tank railcars, while the remaining 48,251 were freight ones.

Generally speaking, tank railcars are useful for handling petroleum products, fertilizer products, edible oils and syrups, chemicals, and more. They can also handle things like sulfuric acid and molten sulfur, not to mention hydrochloric acid, if they fall under a special designation. Meanwhile, freight cars can handle most anything else. Box cars, which account for only a very small portion of the company’s fleet, handle things like food, consumer goods, forest products, packaging, and so much more. But the other freight cars handle industrial goods, construction products, steel, aggregates, waste, coal, and a wide variety of other commodities. It’s these types of cars that comprise most of the company’s focus in North America. In fact, when talking about its global fleet, about 39% are classified as general service tank cars. However, the company does have rather significant exposure to certain specialty areas that, in theory, should prove particularly profitable.

According to management, it does also focus on certain international markets. As of the end of the most recent quarter, 29,371 of its railcars served various European countries. However, the company also has 9,501 railcars that are centered on the Indian market. This has been an area of particularly fast growth in recent years. Year over year, the company grew its Indian fleet by 49.6%. This compares to the 3.2% growth rate seen in Europe and the 0.5% experienced in North America. With this massive fleet, the company does serve a wide variety of industries. I already talked about the types of commodities that it focuses on and the nature of some of its railcars. But in terms of industry emphasis, about 28% of all revenue is attributable to the chemicals and plastics industry, while another 24% stems from refiners and other petroleum companies. An impressive 19% involves railroads and other transports. And then we have food and agriculture at 13%.

Besides leasing out these railcars, the company does have other activities that it engages in. For instance, it’s also a cofounder of and 12.9% owner of RailPulse, which is a joint venture that includes other players in the rail space. This joint venture was built in order to create what management calls an industry wide telematics program for the purpose of being able to use telematics devices to gather data and improve rail safety while also being affordable for rail shippers throughout North America. This could be an interesting source of additional value for the company in the years to come. However, it’s still fairly small, having just done a soft launch late last year. The company also provides various maintenance activities under its segments. Plus, it has another segment dedicated to owning and leasing out spare aircraft engines. At the end of last year, GATX Corporation owned 29 aircraft spare engines, with 14 of these being on long term leases with airline customers and the other 15 employed as part of an engine capacity agreement with its partner, Rolls Royce, for use in that company’s engine maintenance program. The company also manages a small number of railcars for other parties, and it has 523 locomotives as well.

In the past three years, GATX Corporation has done really well from a growth perspective. Because of an increase in the size of its fleet, caused by significant investments totaling $3.94 billion, the company has been successful in growing its revenue from $1.26 billion to $1.41 billion. With this increase in scale, accompanied by utilization rates there have been no lower than 99% consistently, the business has seen its net profits climb from $143.1 million to $259.2 million. Of course, other profitability metrics have followed suit. Operating cash flow has grown from $507.2 million to $520.4 million. If we adjust for changes in working capital, we would see this metric rise from $483.7 million to $526.8 million. And lastly, EBITDA for the business rose from $670.4 million to $782.6 million.

On April 23rd, the management team at the company announced financial results covering the first quarter of the 2024 fiscal year. Revenue for that time happened to grow from $338.9 million to $379.9 million. Management cited strong demand globally for most railcar types that it has in its fleet. In addition to seeing a continued increase in the size of its slate, the company also managed to generate $33 million of revenue associated with remarketing activities. Revenue here is generated by the Rail North America segment when it sells existing railcars and any leases associated with them. Though it is likely that this nice chunk of revenue is temporary. I say this because management is actually forecasting total remarketing income this year being lower than it was in 2023. Unfortunately, net profits did decline, dipping from $77.4 million to $74.3 million. This was mostly because of weakness in the Rail North America segment that was caused by a reduction in gains on asset sales, combined with higher interest rates. The good news was that operating cash flow increased from $95 million to $97.6 million while adjusted operating cash flow expanded from $117.5 million to $135 million. And EBITDA grew from $187.4 million to $212 million.

When it comes to 2024 as a whole, management expects earnings per share to be somewhere between $7.30 and $7.70. At the midpoint, that would translate to net profits of about $268.5 million. If we assume that other profitability metrics will rise at the same rate, we would get adjusted operating cash flow of about $545.7 million and EBITDA of $810.7 million. Using these results, I was able to value the company as shown in the chart above. I did this using the estimates for 2024 and historical results for 2023. Shares don’t look pricey, but they don’t look cheap either. I then compared the company to four other firms that are in the rail space in some capacity or another, with perhaps the most comparable of them being Trinity Industries (TRN). Those results can be seen in the table below. On a price to earnings basis, two of the firms ended up being cheaper than GATX Corporation. This number increases to three of the four on a price to operating cash flow basis and, when it comes to the EV to EBITDA approach, our candidate ended up being the most expensive of the group.

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This valuation approach and the results from it suggests to me that shares look more or less fairly valued. It would be different if the trading multiples for the price to earnings scenario and the EV to EBITDA scenario were in the single digits. But that’s not the case. Is also worth noting that the industry itself is not exactly on great footing at this point in time. While GATX Corporation should get paid either way because of the nature of the leases, and since those are long term, you may not care too much about industry volatility. However, difficult times can make further growth more difficult and can compress pricing power. The fact of the matter is that total rail volume in North America is up 2.1% year over year. But as the picture below illustrates, total car and intermodal volumes for the US on its own are weaker than what they were in 2022 in the US, with traffic year-over-year for the first 16 weeks of the year down 4.6%.

Takeaway

Based on the data provided, I must say that GATX Corporation is interesting. But it’s not a company that I think makes for a great prospect at this point in time. Sure, the business is growing. However, shares are not exactly cheap. In the long run, I suspect that the enterprise will do just fine for itself and its investors. But in the meantime, I think that there are better opportunities on the market that can be had. So because of this, I think that a ‘hold’ rating is most logical right now.