EUR 850.00 For Business Accounts Only

Morningstar | Genesee & Wyoming's North American Carload Growth Remains Strong in 3Q; Pricing Healthy

Short-line railroad specialist Genesee & Wyoming posted consolidated top-line growth of about 5%, to $603 million, which didn’t deviate materially from our expectations. On a year-over-year basis, growth came from solid expansion in North American carload volume across most commodity groups and improving intermodal pricing in the United Kingdom, partly offset by foreign exchange headwinds and the ERS Railway divestiture (June 2018) in the U.K./Europe division. Despite some noise, underlying total adjusted profitability was mostly in line with our forecast. Because our longer-term midcycle revenue and margin assumptions are largely intact, we don’t expect to materially alter our $72 fair value estimate.

North America revenue increased 11.5% year over year, driven by healthy core pricing (up 3.5%; 3%-plus year to date) and strong carload volume growth (up 9%; 6% year to date), particularly in terms of steam coal (low stockpiles), metal (finished steel and pipe), and agricultural product (export soybean meal) movements. Most commodity groups posted growth, save for autos and auto parts. Carload growth will slow in the fourth quarter due in part to softer agricultural exports (tariff related) and disruption from Hurricane Michael, but management said on the call that overall demand conditions remain "generally good." Australia same-rail sales grew about 2% on the back of growing spot coal tonnage in the Hunter Valley region, including benefits from a new train set in New South Wales. U.K./Europe organic revenue expanded about 6% on improving U.K. intermodal performance and higher aggregate carloads in Poland. Excluding U.K. restructuring costs and a few other nonrecurring items, we calculate G&W’s adjusted operating ratio (expenses/revenue) improved 180 basis points to 78.4%.

The North America segment adjusted operating ratio improved to 71.2% from 73.9% thanks to leverage from revenue growth. The adjusted Australia OR deteriorated to 74.2% from 73.2% primarily due to heightened expenses related to growth initiatives. The adjusted U.K./Europe OR improved to 95.2% (from 96.3%, excluding the recently divested ERS operations) driven by restructuring-related cost savings and leverage from stronger U.K. intermodal pricing.