Call: Buy GMT (NYSE: GMT)
Contributor: Diego Borgert.
Timeframe: 18 Months to 2 Years.
Recent Price: $45.34. Entry Price: $42.00-$44.00
Target Price: $58.50.
Strategy: Value, Growth
GATX Corporation (GATX) leases, operates, manages and remarkets long-lived, widely-used assets, primarily in the rail and marine markets. The Company operates through four primary business segments: Rail North America, Rail International, American Steamship Company (ASC) and Portfolio Management. GATX and its rail affiliates lease tank cars, freight cars and locomotives in North America, Europe and India. As of December 31, 2012, GATX’s wholly-owned fleet consisted of approximately 131,000 railcars and 561 locomotives. GATX also has an ownership interest in approximately 30,000 railcars through investments in affiliated companies. Affiliate fleets consist primarily of freight and intermodal railcars. In addition, GATX manages fleets for an affiliate and other third-party owners of approximately 5,200 railcars. (Google Finance)
Things to know about the Railcar market and how it affects GATX from Aimen Consulting (Link at bottom of article):
Rail freight cars tend to be commodity-specific; demand for railcars is correlated with demand for the commodities they carry. In GATX’s case, it is oil from North Dakota, which has seen tank-car demand rise exponentially.
“GATX has effectively 100% utilization in the tank-car industry right now…manufacturing backlog for tank cars (71,704 in Q1) is still at 18 months or more, so it’s hard to see a rapid decline at this point” Analysts expect the backlog to last until 2015. (WSJ)
CEO of GATX Brian Kenney with regard to ‘oil-rail boom’ on July 18th 2013
Average new car prices are the strongest predictor of railcar lease rates. Technological innovations such as that which raises the capacity and, thus, operating efficiency of new railcars, can significantly depress the value of older cars.
Because of the surging demand of tank-cars and short supply “leasing company officials say standard tank-car contracts have been pushed out to 7 to 10 years, and rates have more than doubled since 2008 to around $1,250/month. They are much higher for shorter-term leases” (WSJ)
Full service lessors – lessors with responsibility for the maintenance and repair of the railcars, among other things — account for about 70-75 percent of the tank car market and 40 percent of the total fleet of other freight cars in the United States. Major private tank car lessors include GATX ,Union Tank Car, Procor (a Canadian affiliate of Union Tank Car), GE Rail Services, and PLM (recently acquired by CIT Rail).
Rail carriers in the U.S and Oil companies do not want to own tank cars because of the higher maintenance needed in comparison to other railcars, furthermore, oil companies do not want 40 year assets in the logistics side of their business sitting on their balance sheet. This creates a niche for railcar leasing companies.
GATX Corporation has strong growth opportunities in India as well as favorable conditions for its Rail North America and ASC segment through the increased demand for oil shipping in North Dakota and and shipment of the high margin commodity iron ore. GATX will further realize significant revenue increases through the expiration and renewal of rail cart contracts due to expire in 2013. GATX continues to perform well through synchronization of its business segments. Furthermore, GATX has had investment volume of $470 million year-to-date, and continued success with the “Rolls-Royce” Partnership.
There have now been 3 articles written about the rail-oil boom in the Wall Street Journal in July. The articles are about the increased demand for oil tank cars, and the possible new safety regulations of the older tank cars due to the disaster in Quebec where 72 tank cars exploded due to a brake malfunction. The article on 7/24/2013 suggests that there will need to be 2 operators instead of 1 operator on trains with hazardous cargo. This negative spotlight on rail car companies may push GMT prices down to $42-$44 a share. $42 is the next level of support if the $45 support level does not hold.
The articles can be found here: http://online.wsj.com/article/SB10001424127887323848804578609681519319010.html http://online.wsj.com/article/SB10001424127887324144304578624294156516964.html http://online.wsj.com/article/SB10001424127887324263404578612151990815338.html
I estimate revenue for Rail North America to increase over the next 2 years to $1.13B due to inflation, increased demand for rail carts, and the expiration of the 2009 and 2010 leasing contracts. For GATX as a whole, I estimate revenue to be $1.5B for the 2015 year and set a price target of $58.50 representing a 29% gain from current price ($45.34) for the end of 2015, or a +39% gain from $42/share. The negatives for GATX Corporation at the moment are increased maintenance due in 2014-2016, and possible new regulation for tank car safety.
GATX has been in business for over 110 years. This means: Experience. They have a thorough knowledge of the rail car leasing business and have had the time to diversify the company through its “Portfolio Management”, “Rail Europe” and “Rail India”, their newest venture, as well as owning and operating a multitude of different rail cars. On top of that, the senior management of GATX Corporation have worked through the ranks of the company: some of the senior management have worked at GATX for over 30 years. This is a strong competitive advantage that GATX has in their management. Not only has the company withstood the test of time (Incorporated in 1898), but the leaders of the company have worked their way up through the business and have a vast knowledge of how this railcar leasing company works and how to improve it through acquisition of new investments as well as strategic contract negotiations on leases.
The four segments of GATX’s business are Portfolio Management, Rail North America, Rail International (Europe and India), and American Steamship Company (ASC). Every single branch of GATX has years of experience in their respective markets, a strong presence and the ability to leverage their expertise to provide high quality services to the customer (I.e. leaser).
- This branch of GATX utilizes economies of scope through GATX’S infrastructure and experience in marine equipment, container-related assets, and power generation equipment. They create value through asset bundling and sales to strategic buyers (of which GATX has a broad network of), pro-active end-of-lease negotiations (critical to GATX’s opportunity to increase profits). This segment applies experienced workers skills in equipment valuation, negotiation, among other things to optimize the outcome of lease-end negotiations. The synchronization of their expertise in these areas combined with their existing infrastructure gives GATX a competitive advantage in this industry for generating value to shareholders.
- “”Rail India” provides rail wagon lease financing and related services. It is the first leasing company to be registered under Indian Railways’ Wagon Leasing Scheme, and intends to be the leader in leasing of rail wagons in India. This is achievable by leveraging over a century of operating experience and expertise in North America and Europe.” (GATX website) Rail India provides GATX the opportunity to extend their business into a heavily populated and growing country as well as the opportunity to benefit from the growth of neighboring countries (i.e China, Philippines) . It is an ideal operation to diversify and expand GATX globally and could prove to be extremely valuable in the future.
- GATX has over 20,000 railcars in Europe. The three segments of Rail Europe are based in Austria, Poland and Germany. GATX Rail Austria and GATX Rail Germany (formerly KVG Kesselwagen Vermietgesellschaft) were acquired by GATX in 2002.
- GATX Rail Poland (the former DEC Sp. z o.o.) has been operating on the rail tank car rental market since 1950. Pursuant to the Polish governmental program of petroleum industry restructuring and privatization, in March 2001 DEC Sp. z o.o. (DEC) became a part of GATX Corporation.
- These segments of Rail Europe have been in business for many years. This provides GATX more perspective and insight to the European market as well as an already established position in the railcar rental market. Germany is an industrial hub of Europe. Located in these countries, GATX benefits from a large amount of exposure to potential customers throughout Europe.
American Steamship Company (ASC)
- ASC was founded in 1907 in Buffalo, New York and services the Great Lakes area for transporting dry-bulk commodities including iron ore pellets, coal and limestone aggregates. ASC provides safe, efficient and environmentally responsible waterborne transportation. The Great Lakes fleet consists of 18 self-unloading vessels (13 used today) that range in length from 635-feet to 1,000-feet. The single-trip vessel-carrying capacity ranges from 24,000 to 81,000 gross tons. During the navigation season, the vessels operate 24/7 and require no onshore assistance to unload cargo. Unloading speeds range from 7,000 to 10,000 net tons per hour and can be seen here: http://www.americansteamship.com/self-unloading-technology.php#unloadhere
Pertinent Article about GATX:
GATX’s profits growing thanks to sharp rate hikes
GATX is primarily a leaser of railcars in the U.S. and Europe that had previously been restrained by weak asset utilization that was limiting rates. Conditions have improved significantly, allowing for pricing increases on a year over year basis of more than 30% in the last two quarters. Renewals are now being contracted at more lengthy terms and utilization remains strong. All of this should result in share-earnings growth upwards of 10% this year.
Earnings are likely to demonstrate enhanced stability behind the higher rates and extended terms. The possibility that overcapacity, stemming from excess expansion in the oil market, will again be a hindrance is muted by this strategy. GATX is up against pipeline operators in the market for crude oil transportation and will probably lose share, due to the greater efficiency of that mode of storage.
The selloff of GATX shares due to a first-quarter share profit that fell well below forecasts shouldn’t deter investors. One-time non-operating items were partly to blame for the shortfall. GATX is booked through much of 2014 and into 2015 at record rates. Note that maintenance expense increases of about 10% this year will limit profit growth but the impact should subside over time. GMT stock is worth considering for the long haul.
The important item highlighted in this article is the LPI increase of 36% for leasing rail carts on new contracts. The LPI shows that the increased demand for tank-cars translates to the ability to negotiate contract renewals with 36% higher lease rates, and will continue to do so as more contracts expire and need to be renewed. (This means that upon renewal of a contract, if it was set at $1000 per month, it is now $1,300. Lease terms are also showing increases to an average of 65 months for now). Within the next 4 years, GATX’s Rail North America revenue will increase by at least 30% if the lease rate stays at what it is now.
An interesting thing about the LPI information provided by GATX Corporation’s website is that the years with the highest decrease in lease price was 2009 and 2010, with the average lease lasting 41 and 35 months respectively. These leases are expiring this year and, upon renewal, will generate higher revenue (I estimate 30%-40% to be the LPI for the rest of 2013) Coming up in 2014-2016 GATX will undergo a many maintenance expenses on the company’s rail cars; however, the increased revenue in the rail cart rental business should be able to offset these expenses and lead to higher profits. I estimate maintenance expense to rise to $300 M (from $269.7 M from 2012) when these additional upkeep expenses take place. (http://ir.gatx.com/phoenix.zhtml?c=70051&p=irol-reportsother)
Now is the opportune time to buy, GATX’s price level is near its long-term support at about $45/share. Stochastic, RSI, and the trend of the stock are all indicating a buying opportunity. I advise investors to wait until September to see where the dust has settled on the new safety regulation, should there be any. Short term GATX could reach the $42-$44 price and it would be at that price that I recommend buying shares.(See graph below)
Combining the attractive share price, favorable macro-economic circumstances, and Rail North America’s expiration of the less profitable 2009/2010 contracts, GATX Corporation is a durable investment that has a track record of withstanding the test of time, as well as continuous dividends since 1919 (current yield is 2.73%). Therefore I iterate a Buy with a 24-month target of $58.50 per share, representing a +30% gain.