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Morningstar | Genesee & Wyoming’s North America Division Hit by 1Q Winter Weather, but Europe Margins Improving

Short-line railroad specialist Genesee & Wyoming’s consolidated top line fell 3%, slightly below our expected run rate due to adverse winter weather and flooding-related disruption in North America. That said, management noted that outside of the weather-impacted regions, most of North America “felt pretty good” and the industrial development pipeline remains quite strong. Also, the firm expects to recover some lost business from weather disruption, particularly coal volumes (customer’s plant inventories are low). On a year-over-year basis, the revenue decline stems from unfavorable foreign exchange, the 2018 ERS Railway divestiture in Europe, the expiration of a few short-line leases in Canada, and the weather headwinds.

Total adjusted profitability came in slightly behind our forecast because of weather-related outlays, but adjusted operating ratios (expenses/revenue) in both the Australia and U.K./Europe divisions were in line. U.K./Europe, in particular, is seeing benefits from ongoing restructuring efforts. Our midcycle growth assumptions remain largely intact, but we expect to raise our $72 DCF derived fair value estimate slightly, to $73, due to the time value of money since our previous update. GWR is an impressive well run enterprise, but at $87 per share, the shares in our view are trading in modestly overvalued territory relative to our longer-term expectations for top-line, profitability, and free cash flow growth.

Despite challenging winter storms and flooding, which tempered shipments during the quarter, North America same-rail revenue grew 4% year over year on higher core pricing (up 3%), favorable commodity mix changes, and higher fuel surcharges. Same-rail carload volume declined 1.2% (versus the 6.5% gain posted last quarter) due to unusually severe weather in Canada and the U.S. upper-Midwest. Australia same-rail sales fell 4% on lower agricultural product shipments, driven by drought conditions in the region. U.K./Europe organic revenue was up 8% on improving U.K. intermodal trends, partly offset by lower infrastructure services revenue. Excluding restructuring costs, G&W’s adjusted OR improved to 84.3%, from 84.8%, driven by expense control in Australia and successful restructuring efforts in the U.K./Europe region. Management reiterated 2019 guidance, which calls for adjusted EPS of $4.30-$4.50 (versus consensus of $4.38).