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Here's Why Investors Should Steer Clear of Genesee & Wyoming

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Genesee & Wyoming GWR, like its peers in the railroad space, is suffering from soft freight demand. As freight revenues account for bulk of its revenues (69.8% in the first nine months of 2019), freight-related weakness is hurting the top line. In the first nine months of 2019, revenues declined 3.4% on a year-over-year basis.

Dismal performance of the Australian (which is 51% owned by the company) and U.K./European units is an added headwind. Revenues from these units declined 34.6% in the first nine months of 2019. Moreover, Genesee & Wyoming has a significant exposure to UK/Europe. In the first nine months of 2019, the company’s U.K./European operations accounted for approximately 27.3% of its total revenues. This significant exposure might be a cause for concern due to complications that are likely to arise once the UK leaves the EU. Additionally, high capital expenses are weighing on the bottom line.

Following the above-mentioned headwinds Genesee & Wyoming has underperformed its industry in the past three months. The stock has gained merely 0.9% compared with its industry’s 5.4% growth.


Notably, Genesee & Wyoming’s third-quarter 2019 earnings report released on Nov 6 bears evidence of this dismal picture. The company’s third-quarter earnings (excluding 6 cents from non-recurring items) of $1.22 per share fell short of the Zacks Consensus Estimate by 8 cents. The bottom line also decreased 0.8% year over year. Moreover, total revenues of $583.7 million declined 3.3% year over year.

Due to the weak freight-related scenario, freight revenues that accounted for bulk (70.3%) of the top line in the September quarter dipped 3.1% to $410.15 million. Freight-related revenues contributing 24.2% to the top line slid 2.8% to $141.37 million. The balance came from ‘other revenues’.

Total operating expenses (on a reported basis) decreased 1% to $470.9 million. Operating income (on a reported basis) decreased 11.7% to $112.8 million in the reported quarter.

Segmental Results in Q3

Geographically, operating revenues from North American operations declined slightly in the September quarter due to weak freight revenues. Moreover, the same from the company’s Australian and U.K./European operations declined 6.7% and 6.6%, respectively. Notably, North American, Australian and U.K./European operations contributed 60%, 12.3% and 27.4%, respectively, to total operating revenues.

At the North American unit, adjusted operating ratio (operating expenses as a percentage of revenues) deteriorated to 72.9% from 71.9% in third-quarter 2018. Notably, lower the value of the metric the better. Moreover, at its Australian operations, the same deteriorated to 72.8% from 73% a year ago. At the U.K./European operations, operating ratio worsened to 101.5% from 97.3% in the prior-year quarter. On a consolidated basis, the metric (reported) stood at 80.7% compared with 78.8% a year ago.

Estimate Revisions & Zacks Rank

Downward estimate revisions highlight the pessimism surrounding the stock. In fact, the Zacks Consensus Estimate for 2019 earnings has been revised 0.9% downward over the past 60 days.

Given this bleak backdrop, the company’s Zacks Rank #4 (Sell) is well justified and hence we believe investors should discard this stock from their portfolios at the moment.

Stocks to Consider

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