GATX Corp.: Poor Performance....Temporary?

Price:$42.50;Forward P/E:13.75;Earnings Growth:25%;Projected Sales Growth:5%;Market Cap: $1.9 billion

Why it's Featured: Strong current demand for products.
Danger Zones: Heavy debt load;

GATX Corporation leases (GMT-NYSE), operates, manages, and remarkets assets in the rail and marine markets.  The company operates in three segments: Rail, American Steamship Company (ASC), and Portfolio Management.

Rail leases tank cars, freight cars, and locomotives to customers operating in chemical, petroleum, food/agriculture, and transportation industries in North America and Europe.  As of December 31, 2011, it owned a worldwide fleet of approximately 130,000 railcars.  This segment also had an ownership interest in approximately 32,000 railcars through affiliates, as well as managed approximately 2,000 railcars for third-party owners.

ASC owns and operates a fleet of U.S. flagged vessels on the Great Lakes, providing waterborne transportation of dry bulk commodities, such as iron ore, coal, limestone aggregates, and metallurgical limestone for customers in the steel, electric utility, and construction industries.  As of December 31, 2011, this segment?s fleet consisted of 17 vessels, including 14 diesel powered and 3 steam powered vessels.

Portfolio Management provides leasing, asset remarketing, and asset management services to the marine and industrial equipment markets. This segment invests primarily in operating and finance lease assets and secured loans.  GATX Corporation was founded in 1898 and is headquartered in Chicago, Illinois.

GATX has been down lately, about 10% since January.  A sharp contrast to the overall market which has been up about 9%.  The irony is that  earnings have been solid and are expected to remain that way.  In fact, they went from $1.72 in 2010 to $2.01 last year.  This year, consensus from 6 analysts is $2.62, then $3.03 for 2013.  Second quarter results are forecast at 68 cents compared to 43 cents last year in the second, a 58% increase.

To further help the stock, there's a decent dividend attached, currently yielding 3%.  With solid earnings this year and next, look for that to increase from $1.20.  The dividend was bumped 3 of the last 4 years.

Part of the rosy forecast comes from a belief the economy will continue to improve.  With more goods moving around the country, railroads get busier.  A large percentage of all American goods are shipped by rail.  Furthermore, many foreign countries are realizing the efficiency of railroads and are committed to improving and expanding their railroads.  That means more railcars will be needed.

The current stock of railcars owned by GATX is working hard.  Fully 98% of the company's leased railcars were active at the end of 2011, an increase of 80 basis points from the same time in 2010.  Furthermore, the average contract for utilizing the cars went up to 45 months, about 10 months longer than contracts written in 2010.

With demand for cars rising, rail companies have a dilemma.  Buying their own is expensive, capital intensive.  The alternative is to lease them from a company like GATX.  That suggests renewal rates and extended contracts should stay strong, as long as the economy does.

Here's the one big caveat about GATX: profits don't cover interest payments.  Debt is 74% of capital at $3.55 billion.  Another way to look at it is debt to equity of 314.9%.  With that much debt and the interest rate cycle almost certainly at the bottom, future interest payment can only go higher.  It's most likely the heavy debt load is giving investors pause on GATX, knowing that interest costs will only go one way.  Also, the stock had a decent run up the previous four months (going from $29 to $45) so some profit taking would be natural.

- Essential Numbers:
- Trailing P/E: 17.73
- Price to sales: 1.56
- Price to book: 1.76
- Operating margin: 25.69%
- Profit margin: 8.74%
- Return on equity: 9.89%
- Return on assets: 3.6%
- Revenues last 12 months: $1.27 billion
- Total cash: $263.7 million
- Cash per share: $5.65
- Current ratio: .80
- Book value per share: $24.16
- Beta: 1.44
- 52 week change: 4.4%
- Shares outstanding: 46.7 million
- Float: 46.41 million
- Held by insiders: .38%
- Held by institutions: 95%

Aggressive investors who see the global economy expanding will like this story.  GATX is another way of benfitting from an economic recovery.  But keep in mind all the debt that needs to be serviced.  It will only get heavier as rates rise.

- Company Web site: www.gatx.com

- Ted Allrich
May 3, 2012