GATX Upped to Outperform

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GATX Corporation’s (GMT) first quarter adjusted earnings were impressive, with year-over-year improvements on higher lease rates. Moreover, increased asset utilization through the reduction of idle rail cars and deployment of new rail cars will be accretive to the company’s long-term growth given the growing rail freight market. Further, GATX enjoys a healthy balance sheet and is committed to enhance shareholders’ value through strong dividend payments. Consequently, we upgraded our long-term recommendation on GATX Corp. to Outperform.

GATX Corp. is focused on improving its financial performance based on solid lease rates and North American fleet utilization, and is maintaining an earnings estimate in the range of $2.40–$2.60 per share for 2012.

The company expects lease pricing to increase approximately in the mid-teens; and hopes that asset utilization as well as remarketing opportunities would remain encouraging for the year, given the improving market fundamentals.

GATX Corp. is poised to further benefit from renewed or new lease contracts, which will leverage the benefits of higher lease prices. Management outlined the business strategy for the yea that will focus on longer lease terms to tap the prevailing higher lease rates for a longer period. Further, management’s constant efforts to reduce the number of idle railcars also bode well for the company’s productivity gains in the future.

The emerging rail markets are also likely to provide excellent opportunities over the longer term. Rail registered modest improvements in Europe given higher lease pricing and the expansion in the wholly owned tank car fleet due to investments in automotives. The increase in the Rail segment’s wholly owned tank car fleet is expected to bring in opportunities for the European tank car business, which will likely drive the growth prospects in Eastern Europe. The company’s strategy to purchase railcars at a lower market price and lease it on a short-term period during the market downtrend also bodes well, allowing it to capitalize more on the current market scenario in the rail freight market.

The company’s Specialty segment primarily focuses on capitalizing on the asset remarketing opportunities. GATX Corp. remains focused on restructuring costs and evaluating investment opportunities in this segment. Further, the segment will continue to benefit from the lease financing joint venture with Rolls Royce (RYCEY). Going forward, ASC is expected to grow on higher steel production driven by strong sales in automotives. Further, the company is planning to work out a more competitive pricing in order to gain more business and utilize idle vessels, resulting in increased profitability.

We believe an attractive and diversified asset base along with a strong balance sheet and access to capital will help the company to enhance profitability with the eventual turn of the economic cycle. The company remains committed to return shareholder value through dividend payments. After maintaining a fixed rate of annual dividend of $1.12 per share in 2009 and 2010, GATX raised its dividend last year by 3.6% to $1.16 per share and further by 3.4% to $1.20 for this year. This represents the company’s strong long-term growth prospects on continued lease market recovery.

For the short term (1-3 months), the stock holds a Zacks #2 Rank (Buy).

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