Description
Gatx is part resource conversion, part undervalued company.
In the recent past it has had 3 business groups; Gatx Rail, Capital and Integrated Solutions; which have had RoE's of roughly 21%, 21% and 12% respectively (reduced by 1-2% for corporate overhead) since 1996.
The Rail Group leases and maintains tankers, hopper cars, etc in the US, Europe and Australia. The Capital Group provides equipment leasing including aircraft and technology. The Integrated Solutions Group consists of oil terminals, storage and logistics operations. The high debt levels ($3,800m debt to $900m equity at Dec 1999) reflects the economics of the lease business.
The Integrated Solutions Group was formed in 1997 with a view to disposition of the assets - a process which is now nearing completion. Based on 1999 annual report figures (as are most of the numbers in this text) this should release about $220m of equity (the total sale price is somewhere north of $1billion).
The reasons for interest in Gatx are best summarised by considering two points;
1. What management will do with this $220m.
2. How the market will appraise a company with a 20% RoE.
The answer to (1) needs to take into consideration some allowance for recent aircraft litigation (which management have estimated at a maximum of $100m, prior to any insurance recoveries). More positively is management's stated intention of reinvesting in the higher RoE Rail and Capital Groups and extending the share buyback program (a change from the 1980's - see the appendix of Whitman's 'Value Investing').
The answer to (2) no one can be certain of, but before restating earnings for the $100m litigation liability, the company earned $3.37 per share in 2000. At $45 you're buying at a P/E of 13.5, which combined with the high RoE and sharebuyback suggests that earnings should grow satisfactorily while you wait for the market to price in the improved RoE and use of capital.
Growth from successfully reinvesting 50% of earnings would be approximately 10%. Management is targeting a 12-15% growth rate over the medium term, but say this is unlikely in 2001. Paragraphs 6-9 of http://biz.yahoo.com/prnews/010123/il_gatx_co.html are worth reading in this regard.
RECESSION: This concern seems to be on everyone's mind at the moment. A recession may adversely affect railcar usage rates - potentially offset by the congestion likely to accompany any further rail mergers (which lowers railcar productivity and so increases demand).
Many of the Capital Group's activities provide an alternative source of financing for many companies which may have difficulty in raising capital during a recession (see, for example the difficulty that Lucent and other providers of vendor financing are experiencing). The company has said "GATX experiences some of its most attractive investment opportunities during periods of slower economic growth" and this may provide good opportunities to reinvest the proceeds of asset sales.
* EPS prior to litigation charge
Catalyst
Sale of the Integrated Solutions assets are nearly complete (it may take a quarter or two to fully reinvest the proceeds) and reserves have been set aside to cover the litigation. All of the necessary catalysts are now in place.