GATX Slips on Low Lease Rates - Analyst Blog

GATX Corporation (GMT), a leader in leasing transportation assets, reported fourth quarter adjusted earnings of 33 cents per share, which missed the Zacks Consensus Estimate of 40 cents and was below the earnings of 35 cents in the year-ago quarter. The decline was due to a lower marine demand and fewer rail lease rollovers.

Adjusted earnings for fiscal 2010 also slipped 11% to $1.62 per share from $1.82 in 2009.

Revenue for the fourth quarter upped 1.3% year over year to $306.3 million and was ahead of the Zacks Consensus Estimate of $302 million. For the full year, revenue grew 3.7% to $1.2 billion from $1.1 billion in the prior year.

Segment Results

Profit from the Rail segment was $40.7 million in the reported quarter compared with $36.4 million in the year-ago quarter. Lease renewal pricing on cars in GATX's Lease Price Index (LPI) decreased 14.0% compared to a decrease of 18.7% in the year-ago quarter. The company shortened the term of lease renewals to 36 months from 43 months at the end of the fourth quarter.

Profit for 2010 declined 16.8% to $161 million from $193.5 million in 2009. The reduction in profit was driven by the decline in lease income due to lesser cars in the North American fleet and depressed lease rates on renewals throughout 2010. Lease renewal rates on cars in LPI showed a decline of 15.8% compared to a decline of 11% in the prior year.

As of December 31, 2010, North American fleet totaled approximately 111,000 cars, and fleet utilization rose to 97.4 % from 95.9% in 2009. The European wholly owned tank car fleet totaled approximately 20,000 cars and utilization was 95.7% versus 94.7% in the last year.

Profit from the Specialty segment inched up to $8.5 million in the reported quarter from $8.1 million in the year-ago quarter. For 2010, the segment profit declined to $48.7 million compared to $51.6 million in 2009 attributable to lower remarketing income and lower earnings from the marine joint ventures.

The Specialty portfolio currently comprises approximately $744.4 million of owned assets (including on and off balance sheet assets) and third-party managed portfolios of approximately $241.9 million.

American Steamship Company (ASC) segment profit climbed 10% year over year to $6.6 million in the fourth quarter and shot up 77.6% year over year to $28.6 million in 2010. The increase was mainly driven by greater demand for iron ore shipments.

Outlook

For fiscal 2011, management expects earnings in the range of $1.70–$1.80 per share.

Our Analysis

We believe GATX remains focused on lease pricing improvement, asset utilization, cost containment and effective asset remarketing, which will boost long-term performance as the economy recovers. The company shortened the term of lease renewals in anticipation of an eventual market recovery, which is expected to enhance its profitability.

However, we remain on the sidelines as lease pricing remains challenging. Renewal rates are still lower than the previous levels and are expected to strain revenue in 2011. Charter marine rates will also remain a headwind to revenue due to a supply and demand imbalance. Additionally, the company also faces competition from J.B. Hunt Transport Services (JBHT) in Specialty and ASC segments.

We are currently maintaining our long-term Neutral recommendation on the stock with the Zacks #3 Rank (Hold).

 
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