GATX Remains Neutral

We believe that GATX Corporation (GMT - Analyst Report), a leader in leasing transportation assets, has significantly benefited from improving market fundamentals in its leasing business. Based on solid lease rates and North American fleet utilization, the company expects earnings in the range of $2.40–$2.60 per share in 2012.

GATX Corp. is poised to further benefit from renewed or new lease contracts, which will leverage the benefits of higher lease prices. Management outlined the business strategy for the year, which will focus on longer lease terms to tap the prevailing higher lease rates for a longer period. Further, management’s constant effort to reduce the number of idle railcars also bodes well for the company’s productivity gains in the future.

The rail industry continues to improve in North America with enhanced capacity and fewer idle cars due to the increased fleet utilization. GATX’ lease pricing showed remarkable improvements on management’s constant efforts to reduce the number of idle railcars.

GATX Corp. is set to invest with the objective of growing the company’s asset base at attractive valuations when the opportunity arises. Earlier this year, GATX Corp. purchased 12,500 new railcars from Trinity Industries and expects delivery over a five-year period ending 2015. The company already took delivery of approximately 1,100 railcars last year. The order includes tanks and freight cars, which are expected to improve service capacity over the long term. Overall, the total rail investments in 2011 were approximately $421 million, reflecting management’s focus on building rail assets for future growth.

The company remains committed to returning value to shareholders through dividend payments. After maintaining a fixed rate of annual dividend of $1.12 per share in 2009 and 2010, GATX raised its dividend last year by 3.6% to $1.16 per share and further by 3.4% to $1.20 for this year. This is evidence of the company’s strong long-term growth prospects and is based on continued lease market recovery.

However, GATX Corp. operates in a highly competitive business environment, particularly in Specialty and ASC segments, in which it faces competition from the likes of J.B. Hunt Transport Services (JBHT - Analyst Report). Competitors may offer leases and loans to customers at lower rates than GATX, thereby affecting the company’s asset utilization or ability to lease assets profitably. Further, weak economic conditions, financial market volatility and other factors may decrease customer demand for GATX’ assets and services while negatively impacting its business and results of operations.

The company’s profitability is largely dependent on its ability to maintain assets on lease at satisfactory rates and to re-lease or sell assets upon expiration. An economic downturn resulting in lower demand, changes in customer behavior and supply/demand dynamics can adversely affect asset utilization and lease rates.

The company’s rail and marine operations are subject to various laws, rules and regulations administered by authorities in jurisdictions that significantly constrain GATX’ business strategies.

Hence, we are currently maintaining our long-term Neutral recommendation on GATX, supported by a Zacks #3 Rank (Hold).