Gordon Johnson Wants You To Know About Sell-Rated GATX

Gordon Johnson of Axiom Capital Research said the accounting changes at GATX Corporation GATX are “deceptive” and “double counting.” He maintains his Sell rating on the stock.

In the fourth quarter of 2015, they wrote down the value of their railcars by $2.5 million. But, when the writedown increased to $30 million in the fourth quarter of 2016, they reclassified it as an “impairment,” allowing them to take it out of non-GAAP EPS (providing a $0.37/share boost to C4Q16 non-GAAP EPS).

'Increasingly A Joke'

“This is the definition of deceptive accounting, in our view, and why non-GAAP numbers are increasingly a joke,” Johnson told Benzinga.

In other words, GATX now has the ability to write-down the value of a railcar asset, classify the loss as an “impairment” – thereby allowing it to adjust this out of non-GAAP EPS. The company can later sell the asset for above the current book value (but below the pre-impairment value), booking the gain in non-GAAP EPS — e.g., double counting.

Further Questions

Johnson questioned why GATX is adding back the impairment charge to non-GAAP EPS in year one, but including the gain in non-GAAP EPS in year two.

GATX reported rev/GAAP-EPS of $362 million/$0.77, falling short of consensus’ estimates of $358 million/$1.05.

“We believe this form of accounting chicanery allows GATX to manage non-GAAP EPS to whatever they please. Stated differently, we see this method as dubious,” Johnson wrote in a note.

Coming To Conclusions And Looking Forward

The analyst also sees downside to GATX’ ’17 non-GAAP EPS guidance of $4.40–$4.50 as likely (Street $4.52) following the company’s commentary that “the downturn in the N. American rail industry may be more prolonged than in prior cycles."

“Thus, in short, with the value of its assets in decline — a lynchpin of our bearish thesis — yet net-debt essentially stagnant ($3.96 billion in 4Q16 vs. $4.00 billion in 3Q16), we see the value proposition underlying the GATX story in structural decline at present. We do not feel this is well understood at present,” Johnson added.

GATX closed Friday's session up 0.61 percent at $59.45. Johnson has a price target of $27.