Gordon Johnson: Sell GATX Corp, Rail Leasing Rates Look Scary

• GATX Corporation GMT shares have declined 28.68 percent year to date, almost touching their 52 week low at $41.04 on December 11.
• Axiom’s Gordon L. Johnson II has initiated coverage of the company with a Sell rating and price target of $20.
• Johnson prefers to maintain a short position, given the deteriorating rail demand serving as a backdrop for the largest railcar production upcycle, the company making losses on asset disposition and crashing lease rates.

Analyst Gordon Johnson explained that GATX Corp “derives the bulk of its income from leasing railcars to various N. American commodity mkt participants, & boasts four divisions, the most important of which is Rail N. America.”

However, the company is currently facing three key risks. Firstly, the largest ever upcycle in railcar production took place during December 2014 to the end of June 2015, primarily targeted at the leasing market. However, given that the US energy/Canadian commodity boom has come to “an abrupt end.” This in turn has led to the currently deterioration in rail demand.

Secondly, for the first time in its history, the company had to sell railcars below their book value, making a loss on asset dispositions in C3Q15.

Lastly, with meaningful improvement in railcar performance, along with new regulations permitting railcars to remain in in service till 2020, the new railcars that are coming online are leading to the lease rates crashing.

Johnson believes that all this has led to GATX Corp’s fundamentals being “on the precipice of a severe correction lower.”