BofA Downgrades Genesee & Wyoming On Valuation After 8% Rally

The fundamentals of Genesee & Wyoming Inc GWR, which owns or leases short-line and regional freight railroads, are on solid footing, but valuation has sent Bank of America Merrill Lynch to the sidelines.

The Analyst

Analyst Ken Hoexter downgraded Genesee & Wyoming from Buy to Neutral and lifted the price target from $90 to $94.

The Thesis

Genesee & Wyoming shares have added about 8 percent since July 30, taking the P/E multiple to 19.3 times — a premium to the current average for the rail group, Hoexter said in a Thursday note. (See the analyst's track record here.) 

The move has taken the shares closer to BofA's previous price target, the analyst said. The 2-point premium the shares have acquired over the rail group now is in with historical trends, the analyst said. 

The company has suggested that it is seeing its best operating environment in years, notwithstanding headwinds from higher fuel prices and a drag from Class I rail service issues, Hoexter said.

BofA's estimates suggest an acceleration in growth from 1.8 percent in the first half of 2018 to 5 percent in the second half on the basis of robust North American growth and new Australian contracts, the analyst said. 

Hoexter expects Genesee & Wyoming's operating ratio to improve from 83.4 percent in the first half of 2018 to 79.8 percent in the second.

The price target increase represents a one-turn rise in the P/E multiple from 19.5 times to 20.5 times on BofA's 2019 EPS estimate.

The Price Action

Genesee & Wyoming shares have rallied about 12.8 percent year-to-date.

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