GATX Performs Below Par

GATX Corporation (GMT - Analyst Report), a leader in leasing transportation assets, has reported second quarter 2011 adjusted earnings of 43 cents per share, which missed the Zacks Consensus Estimate of 46 cents. The results, however, showed an improvement from adjusted earnings of 39 cents in the year-ago quarter.

Revenue for the second quarter grew 9.2% year over year to $314.6 million and surpassed the Zacks Consensus Estimate of $314 million aided by improving lease rates and North American fleet utilization.

Segment Results

Profit from the Rail segment increased to $56.7 million in the reported quarter from $29.4 million in the year-ago quarter. Lease renewal pricing on cars showed a massive improvement on the heels of increased asset remarketing, partially offset by higher maintenance expense in Europe.

GATX’ Lease Price Index (LPI) improved substantially to 4.4% from negative 18.6% in the year-ago quarter on fewer idle railcars. Further, the term of lease renewals remained flat with the first quarter at 41 months and increased from 36 months in the year-ago quarter.

As of June 30, 2011, the North American fleet totaled approximately 108,764 cars compared with 108,626 cars at the end of second quarter 2010. Fleet utilization rose to 98.2% from 97.8% in the year-ago quarter. The European wholly owned tank car fleet totaled approximately 21,000 cars and utilization was 95.7% versus 95.8% in the year-earlier quarter.

Profit from the Specialty segment decreased to $8.8 million in the reported quarter from $14.5 million in the year-ago quarter due to lower asset remarketing income and affiliate earnings. The Specialty portfolio currently comprises approximately $802.5 million of owned assets (including on and off balance sheet assets) and third-party managed portfolios of approximately $185.4 million.

Profit from the American Steamship Company (ASC) segment declined 5.5% year over year to $0.8 million in the second quarter. However, the company registered growth in its Steel mill capacity utilization and production increased 4.5% at the end of second quarter compared to year-ago period

Guidance

For fiscal 2011, management raised its previously projected earnings estimate of $1.70–$1.80 per share to $1.85–$1.95.

Our Analysis

Given the ongoing economic recovery, we believe GATX will remain focused on improving lease pricing, asset utilization, effective asset remarketing and improve infrastructure through investing in railcars. The company has already ordered 12,500 new railcars that will be deployed over a five-year period.

However, we remain on the sidelines due to volatilities in lease pricing and difficult market conditions surrounding marine joint ventures. Additionally, the company also faces competition from J.B. Hunt Transport Services (JBHT - Analyst Report) in Specialty and ASC segments.

We are currently maintaining our long-term Neutral recommendation on GATX. For the short-term (1–3 months), the company has a Zacks #2 Rank (Buy).

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