Genesee & Wyoming: Back On Track To Being Best In Class

Genesee & Wyoming Inc GWR, a U.S.-based owner and operator of freight railroads across the world, has underperformed its Class I peers since 2015 but now one analyst is confident the tide has turned.

The Analyst

JPMorgan's Brian Ossenbeck initiated coverage of G&W's stock with an Overweight rating and a $100 price target.

The Thesis

G&W has consistently underperformed its rivals since 201,  but a restructuring of the international operations puts the company on pace to generate a best-in-class earnings growth, Ossenbeck said in a note. Specifically, in the North American market, G&W is adding scale and acquisitions of contiguous railroads could provide new "singles and doubles." The North American business has above-average exposure to infrastructure-sensitive commodities while the company also competes with trucks where tighter capacity supports metals, paper and food product volumes.

In Australia, the company diversified its business to replace lost profit from bulk commodity and metal prices with the acquisition of GRail while also establishing downside protection through "take or pay" coal contracts with built-in growth beginning in 2020.

\G&W was "caught off-guard" by a policy shift in the U.K. coal market and the company reacted by re-allocating assets and trimming its headcount. But the first quarter of 2017 marked a margin inflection point and the analyst's estimate is calling for a 360 basis point of operating margin expansion by 2019, which is greater than the consensus estimate of a 220 basis point improvement.

Price Action

Shares of Genesse & Wyoming were trading lower by around 0.7 percent early Tuesday morning.

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