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Morningstar | Genesee & Wyoming Finishes 2018 With Solid North American Carload Growth

Short-line railroad specialist Genesee & Wyoming’s consolidated top line increased about 1% in the fourth quarter, largely in line with our expectations. On a year-over-year basis, relatively modest revenue growth stems from unfavorable foreign exchange, the June 2018 ERS Railway divestiture in Europe, and the expiration of a few short-line leases in Canada. Excluding these items, we estimate that same-rail revenue increased in the midsingle digits, as strength in North American carloads (across most commodity groups) and U.K. intermodal growth offset flattish revenue trends in Australia stemming from softer agricultural product shipments. Underlying total adjusted profitability in the quarter was mostly in line our forecast, as was management’s guidance for an adjusted operating ratio (expenses/revenue) of 80%-81% in 2019. Revenue guidance for 2019 came in a little below our expectations, but medium-term growth opportunities remain solid, including a healthy North American pipeline of industrial development projects and spot-coal haulage contracts in Australia. As we incorporate full-year 2018 results into our model, we don’t expect to materially alter our $72 fair value estimate.

North America revenue grew 5.5% year over year on the back of strong same-rail carload volume (up 6% in the quarter, 6% for full-year 2018), particularly in terms of steam coal (low stockpiles), metals (finished steel and pipe), and petroleum product movements. Australia same-rail sales came in relatively flat as lower agricultural product shipments (driven by drought conditions in the region) offset growing spot-coal tonnage in the Hunter Valley region. U.K./Europe organic revenue was up roughly 5% on improving U.K. intermodal performance and higher aggregate carloads in Poland, partly offset by lower infrastructure services revenue. Excluding restructuring costs and a few other nonrecurring items, G&W’s adjusted OR improved to 80.9% from 81.8%, driven by the North America operations.

The North America segment fourth-quarter adjusted OR improved to 73.6% (from 76.4%) on leverage from revenue growth and solid incremental margins. Adjusted Australia OR deteriorated to 75.1%, from 70.2% because of coal-traffic mix changes and lower agricultural product revenues linked to the drought. The adjusted U.K./Europe OR worsened to 98.3% (from 96.7%) as rising driver-related costs and lower infrastructure-services activity more than offset the firm’s restructuring efforts over the past year, though those efforts are increasingly bearing fruit.