GATX Outperforms on Lease Rates

GATX Corporation (GMT - Analyst Report), a leader in leasing transportation assets, has reported first quarter 2012 adjusted earnings of 69 cents per share, which breezed passed the Zacks Consensus Estimate of 49 cents.

Adjusted earnings for the first quarter shot up 59.4% from 28 cents per share in the year-ago quarter, primarily on higher lease rates, improvement in lease terms and higher demand for locomotives.

Adjusted earnings in the first quarter exclude the negative impact of special items that amounted to $2.2 million (5 cents per share).

Revenue for the first quarter grew 7.4% year over year to $284.5 million and surpassed the Zacks Consensus Estimate of $282 million aided by lease rates, North American fleet utilization and growth in the lease terms.

Segment Results

Adjusted profit from the Rail segment soared to $61.1 million in the reported quarter from $44.4 million in the year-ago quarter. Adjusted profit for the quarter excludes the negative impact of $2.5 million related to pre-tax expenses. Lease renewal pricing on cars showed a massive improvement in lease rated and lowered inventory costs due to the higher rate of contract renewals.

GATX’ Lease Price Index (LPI) improved substantially to 19.2% from negative 0.5% in the year-ago quarter on fewer idle railcars. Further, the term of lease renewals increased to 55 months from 41 months in the year-ago quarter.

As of March 31, 2012, the North American fleet totaled approximately 109,116 cars compared with 109,780 cars at the end of first quarter 2011. Fleet utilization remained at 98.5% compared with 97.8% in the year-ago quarter. The European wholly owned tank car fleet totaled approximately 21,064 cars from 20,524 in the year-ago quarter. Fleet utilization was 96.7% versus 95.8% in the year-earlier quarter.

Profit from the Portfolio Management segment increased to $22.0 million in the reported quarter from $10.7 million in the year-ago quarter driven by higher asset remarketing opportunities. The segment comprises approximately $831.4 million worth owned assets (including on and off balance sheet assets) and first-party managed portfolios of approximately $154.1 million.

Profit from the American Steamship Company segment reported profit of $2.1 million versus $0.8 million in the year-ago period. Given the limited marine operation during the winter season, the segment’s profits remained restricted compared to the other segments.

Liquidity

The company exited first quarter 2012 with cash and cash equivalents of $141.0 million, compared with $248.4 million in 2011.

Guidance

For fiscal 2012, management maintained its projected earnings estimate of $2.40-$2.60 per diluted share.

Our Analysis

We expect GATX Corp. to benefit from higher lease rates and increased asset utilization and asset remarketing opportunities. The company’s segments remain poised to deliver strong results given improvements in underlying market fundamentals.

Further, expansion of the company’s asset base to enhance its long-term performance as well as paying higher returns to shareholders through dividend payments bode well for increased market traction. However, regulatory pressures and competitive threats from carriers like J.B. Hunt Transport Services (JBHT - Analyst Report) compel our cautious outlook on the stock.

We are currently maintaining our long-term Neutral recommendation on GATX. However, for the short term (1-3 months), the stock has a Zacks #4 Rank (Sell).