Where to Stash Your Cash in the Railcar Leasing Market
Last week American Railcar Industries released an impressive set of results. The company has been riding the U.S. oil-by-rail boom, and a combination of higher leasing revenues and rising demand for the company's tanker cars drove year-on-year revenue and earnings up 18% and 17% respectively.
But even after these impressive results, American Railcar still trades at a discount to its industry peers. Indeed, American Railcar trades at a trailing-12-month P/E of 10.7 while close peers Trinity Industries and GATX Corporation trade at a TTM P/E of 12.8 and 16.9 respectively.
The question we have to ask is, does American Railcar deserve this low valuation?
Well for a start, American Railcar lacks the diversification of peer Trinity. In particular, according to American Railcar's own website, the company only offers railcar-related services, such as manufacturing, fleet management, repair, and parts. Trinity on the other hand is involved within a range of industries including railcar leasing, production, inland barge manufacture, construction services and equipment production for the energy industry.
This diversification outside of the rail industry does give Trinity an advantage. Actually, of Trinity's total $1,110 million in revenue reported for the fiscal third quarter, 78% came from the rail division. So, for the most part the company is still railroad-focused.
What's more, Trinity's operating margin for its Railcar Leasing and Management Services division was close to 49% for the fiscal second quarter. Indeed, although this division only accounted for 14% of revenue, it contributed 36% to operating profit. American Railcar lags Trinity again in this respect as American Railcar has a relatively small rental fleet in comparison toTrinity.
For example, during American Railcar's fiscal third quarter, the company only reported $8.3 million in revenues from its rental fleet, a tiny 4% of overall revenue. However, this translated into 12% of total earnings.
So when it comes to the lucrative railcar rental business, American Railcar's fleet and income lags that of peer Trinity. In addition, American Railcar also lags the diversification of Trinity.
How does American Railcar compare to GATX?
Well, GATX was founded in 1898 and has paid a consistent dividend since 1919, so for this history alone, the company deserves a premium over its peers. Moreover, GATX leases 117,000 railcars within the U.S., 22,000 within Europe, and 46 within India, giving the company international diversification.
GATX is a pure leasing company and has no production operations like Trinity and American Railcar. However, GATX does own the American Steamship Company and has a portfolio of selective domestic marine and container-related assets. So the company has some diversification.
Still, one thing that caught my eye about GATX. The company has extremely high profit margins when compared to the rental divisions of Trinity and American Railcar.
Value of lease assets
Q3 Operating profit
Return on assets
Now, if we compare this to the return-on-assets for both Trinity and American Railcar:
Value of lease assets
Return on assets
We can see that GATX achieves a much higher return on assets than both of its peers. This is extremely impressive and explains GATX's higher valuation over its peers.
What's more, based on these numbers and American Railcar's lack of diversification, American Railcar's low valuation is also justified. It would appear that GATX and Trinity are both stronger companies on multiple metrics and when considering diversification.
A pick-and-shovel energy investment that's printing money
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!
The article Where to Stash Your Cash in the Railcar Leasing Market originally appeared on Fool.com.Fool contributor Rupert Hargreaves owns shares of American Railcar Industries. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.