Jet engines bolster earnings at railcar lessor GATX

GATX tank car

GATX Corp. (NYSE: GATX) reported fourth-quarter 2019 adjusted earnings per share (EPS) of $1.36, well ahead of the $1.04 consensus estimate and $0.84 in the year-ago period. The result excludes a $0.23 per share casualty gain from an insurance recovery on a damaged vessel in its steamship operations.

GATX’s consolidated revenue was basically flat year-over-year at $357 million in the period.

Rail North America

The company’s North American rail operations saw average active railcars decline by more than 1,000 units in its lease fleet to 102,300 cars. Railcar utilization was largely unchanged at 99.3%, but the average renewal lease rate change in the GATX Lease Price Index (LPI) was 9.1% lower in the quarter. The LPI was down only 0.9% in the same period of 2018. The full-year 2019 LPI decline was 3.9% following a 9.8% move lower in 2018. All in, tank and freight car lease rates declined 2% to 3% sequentially from the third quarter. The average lease term for the North American fleet declined by six months year-over-year to 37 months.

GATX Key Performance Indicators

Segment profit in Rail North America declined more than 8% year-over-year to $61.1 million.

“In Rail North America, a continuing market oversupply of railcars, coupled with reduced carload volume and increased railroad velocity, put pressure on lease rates throughout the year,” said GATX President and CEO Brian A. Kenney.

Demand for railcars in North America continues to be pressured by lower volumes (U.S. Class I rail volumes fell 8.2% year-over-year in the fourth quarter with Canadian rail traffic declining 5.8%) and continued efficiency gains associated with precision scheduled railroading (PSR) initiatives resulting in the need for fewer locomotives, railcars and personnel.

“Specifically, we expect the aforementioned market challenges in the North American rail industry to persist in 2020. Revenue pressure on the existing fleet should continue as the average lease rate on lease renewals should be lower than the average expiring lease rate. This will be the main driver behind lower segment profit in Rail North America in 2020,” commented Kenney.

Other segments led by jet engine dispositions

Segment profit in GATX’s international rail business increased more than 40% to $22.9 million as its European operation added more than 1,200 cars to the lease fleet and utilization improved 50 basis points in the quarter.

The bulk of the company’s earnings outperformance came from the portfolio management business.

Through a finance joint venture with jet aircraft engine maker Rolls-Royce Holdings (OTCMKTS: RLLCF), GATX leases aircraft spare engines to commercial airlines and provides sale-leaseback financing of spare engines to Rolls-Royce. In the fourth quarter, the segment profit contribution from the partnership increased sixfold to $27.5 million, largely due to the increase in booked income from increased gains on engine sales, dispositions and unused maintenance reserves. However, the commercial airlines’ reliance on leasing spare engines has supported growth in the unit.

The joint venture has more than 450 engines in the portfolio with a net book value of more than $4.4 billion.

The largest fleet of U.S.-flagged vessels on the Great Lakes, GATX’s American Steamship Co. (ASC) saw flattish segment profit excluding the $8.1 million insurance recovery from a previous vessel fire. Tons carried by the fleet declined nearly 12% in the quarter, with a similar decline in revenue being reported.

Guidance better than expected

Even with the headwinds in the North American rail market, GATX issued favorable EPS guidance. The company expects 2020 EPS to be in the range of $5.50 to $5.80, higher than the current consensus estimate of $5.25.

On the company’s earnings call, Kenney provided further detail on 2020 guidance. He said that revenue at Rail North America will decline 3% as lease rates move lower along with a slight decline in fleet utilization. Tank and freight car rates are expected to be down in the 3% to 5% range in 2020. Segment profit for the group is expected to decline approximately $30 million to $40 million.

Maintenance costs are expected to increase $8 million to $13 million as the company’s ability to successfully renew leases diminishes. This will result in an increase in churn throughout the lease fleet requiring incremental maintenance and prep before the cars can be reassigned to other users. Also, rail ownership costs from recent investments in the fleet will lower segment profit by $5 million to $10 million. However, the decline in segment profit will be partially offset by moderating steel scrappage rates and the potential for higher gains on sale.

“For 2020, we anticipate declining performance at Rail North America to be offset by increasingly strong performance in Rail International and portfolio management,” stated Kenney.

Kenney said that segment profit at Rail International should increase $10 million to $15 million given a higher number of railcars under lease and that segment profit in the portfolio management group is expected to increase $15 million to $20 million.

GATX is a major railcar lessor and manufacturer, with operations in North America, Europe and India.

Shares of GATX are 9% higher on the day.

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