Robust Rail Orders And Rolls-Royce Leases Will Secure Lasting Success

Key Takeaways

• Strong fleet utilization and robust renewal rates suggest stable or growing future revenue.
  
• Favorable secondary market conditions and asset sales boost earnings through substantial remarketing income.
  
• Macroeconomic volatility, high input costs, and changing commodity flows could pressure GATX's revenues and margins across railcar and aircraft engine segments.

Catalysts

Together its subsidiaries, operates as railcar leasing company in the United States, Canada, Mexico, Europe, and India.

• GATX continues to achieve high fleet utilization and strong renewal rates, reflecting solid demand, which could lead to stable or increasing revenue in the future.
  
• The company is successfully executing on a robust pipeline for new railcars from committed supply agreements, indicating potential for revenue growth and asset expansion.
  
• RRPF, the engine leasing joint venture with Rolls-Royce, reports strong demand for aircraft spare engines and a strong investment pipeline, which could drive earnings growth.
  
• GATX is capitalizing on favorable secondary market conditions by selling railcars and generating substantial asset remarketing income, potentially boosting earnings.
  
• The company's diversified fleet and resilient customer base across North America, Europe, and India mitigate risks from economic or geopolitical uncertainty, offering potential protection for net margins.

GATX Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming GATX's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.4% today to 20.8% in 3 years time.
• Analysts expect earnings to reach $402.2 million (and earnings per share of $10.93) by about April 2028, up from $283.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.0x on those 2028 earnings, up from 18.3x today. This future PE is lower than the current PE for the US Trade Distributors industry at 19.4x.
• Analysts expect the number of shares outstanding to grow by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.22%, as per the Simply Wall St company report.

GATX Future Earnings Per Share Growth

Risks

• The ongoing macroeconomic volatility, including tariff impacts and uncertain economic conditions globally, could lead to a sustained slowdown in economic growth, which might negatively affect GATX's revenues and demand for railcars and components.
  
• High input costs, particularly for steel, are driving new railcar prices higher, and while GATX manages a large fleet of existing assets, sustained input cost inflation could eventually pressure net margins if not all costs can be effectively passed through to customers.
  
• The risk of commodity flow changes, particularly those influenced by tariffs or economic conditions, could affect demand for specific types of cars in unpredictable ways, adding potential instability to revenue streams reliant on these markets.
  
• In Europe, economic challenges, particularly in key markets like Germany, could lead to lower railcar demand, with potential impacts on fleet utilization rates and renewal success, potentially affecting earnings from the Rail International segment.
  
• In the aircraft engine leasing business, a slowdown in global air travel due to macroeconomic shocks or tariff-induced economic slowdowns could temper demand for spare engines, negatively impacting the earnings from this segment.

Valuation

• The analysts have a consensus price target of $172.667 for GATX based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.9 billion, earnings will come to $402.2 million, and it would be trading on a PE ratio of 19.0x, assuming you use a discount rate of 8.2%.
• Given the current share price of $145.16, the analyst price target of $172.67 is 15.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.