Zacks_Analysts' Blog : GATX Tops on Lease Rates - Analyst Blog

GATX Corporation (GMT), a leader in leasing transportation assets, has reported fourth quarter 2011 earnings of 67 cents per share, way ahead of the Zacks Consensus Estimate of 55 cents. Earnings in the reported quarter shot up 60% from 42 cents in the year-ago quarter, primarily on higher lease rates and strong asset remarketing activities. For fiscal 2011, earnings increased 36.6% to $2.35 per share.

Revenues for the quarter increased 14.4% to $350.4 million surpassing the Zacks Consensus Estimate of $327 million.  For the full year, revenues increased 8.7% to $1,267.9 million.

In the fourth quarter, profits increased to $86 million from $55.1 million in the year-ago quarter, primarily driven by higher asset utilization and lease rate improvements. For fiscal 2011, profits upped to $303.5 million from $232.2 million.

Total operating expenses (including ownership cost, and other costs and expenses) increased to $314.1 million in the reported quarter compared with $296.2 million in the year-ago quarter. For 2011, operating expenses increased $1,160.3 million compared to $1,107.5 million.  

Segment Results

Profit from the Rail segment soared $58.4% to $62.1 million in the reported quarter from $39.2 million in the year-ago quarter. For fiscal 2011, the company reported profit of $233.4 million against $150.6 million in 2010. Lease renewal pricing on cars showed a massive improvement on the heels of increased asset remarketing and lower inventory due to increased fleet utilization.

GATX’ Lease Price Index (LPI) improved substantially to 13.2% as against a decline of 14% in the year-ago quarter on fewer idle railcars. Further, the term of lease renewals increased to 48 months from 36 months in the year-ago quarter.

The North American fleet totaled approximately 109,070 cars compared with 111,389 cars at the end of fourth quarter 2010. Fleet utilization increased to 98.2% in the quarter from 97.4% in the year-ago quarter. The European wholly owned tank car fleet totaled approximately 20,927, slightly up from 20,432 in the year-ago period, and utilization was 97.1% versus 95.7% in the year-earlier quarter.

Profit from the Portfolio Management (formerly known as “Specialty”) segment decreased to $16.6 million in the reported quarter from $8.5 million in the year-ago quarter. For the full year, profits for this segment were $47.6 million versus $48.7 million in 2010. The results were primarily driven by strong asset remarketing and continued growth in aircraft engine leasing joint venture with Rolls Royce. The Specialty portfolio currently has owned assets worth approximately $846.6 million (including on and off balance sheet assets) and third-party managed portfolios of approximately $166.7 million.

Profit from the American Steamship Company (ASC) segment upped 42.4% year over year to $9.4 million in the fourth quarter. For fiscal 2011, segment profit stood at $27.3 million compared with $28.6 million in fiscal 2010. Increased shipments coupled with strong pricing environment drove the segment’s profit. Additionally, the company has also managed to strike a 5-year labor contract with the American Maritime Officers union at the end of the year. The company, however, suffered substantial losses, which impacted its third quarter results of this segment due to strikes conducted by American Maritime Officers union on expiration of a labor contract in August. However, operations resumed after the expired contract was extended.

Liquidity

The company exited fiscal 2011 with cash and cash equivalents of $248.4 million compared with $78.5 million in 2010.

Capital expenditures were $615 million in 2011, primarily on due to expanding North American and European rail. 

Guidance

For 2012, management expects improvement in Rail’s improved operating results of Rail in North America and Europe and plans to raise rates on 20,000 railcars scheduled for renewal in North America.

Management expects asset remarketing opportunities will to remain favorable for the company. It expects ASC to experience modest demand growth given the sluggish North American auto industry. Marine joint ventures are expected to be impacted by the softness in chemical and bulker markets, partially compensated by improvements in the natural gas carrier market.

For fiscal 2012, management maintained its projected earnings estimate of $2.40–$2.60.

Our Analysis

We expect market fundamentals to continue to improve in 2012, supporting higher lease rates, carloads, increased asset utilization and remarketing opportunities. The company remains focused on expanding its asset base to enhance its long-term performance.  Further, the joint venture with Rolls Royce is also producing strong results for the company, thereby enhancing uplifting its competitive position against rivals like J.B. Hunt Transport Services (JBHT).

We are currently maintaining our long-term Neutral recommendation on GATX. For the short-term (1–3 months), the company has a Zacks #3 (Hold) Rank.