Company Review: Genesee & Wyoming (GWR)

Company Profile: Genesee & Wyoming Inc. (GWR) (obtained via Google Finance)

Genesee & Wyoming Inc. is an owner and operator of short line and regional freight railroads in the United States, Canada, Mexico, Australia and Bolivia. In addition, the Company provides freight car switching and rail-related services to industrial companies in the United States. As of December 31, 2005, the Company owned, leased or operated 49 short line and regional freight railroads with approximately 9,300 miles of track and has access to more than 3,000 additional miles under track access arrangements. On February 13, 2006, the Company and Wesfarmers Limited entered into an agreement to sell its Western Australia operations to Queensland Rail and Babcock & Brown Limited.

Business and Management Review

1) Is the business simple and understandable?

As we have said all week, the railroad industry is simple to understand.  It is all about transporting goods and the main concerns of the railroad are infrastructure and equipment maintenance. 

2) Does the business have a consistent operating history?

The company was founded in the late Nineteenth century as a small railroad that transported salt out of a family owned mine in New York.  Over the next 90 years, the railroad focused mainly on its operations in New York and was highly dependent on the Salt industry.  Following the deregulation of the railroads in the early 1980s, the company began to expand its services through a strategy of acquisitions.  Since then, Genesee & Wyoming has continued to expand through acquiring regional rail companies and improving margins.

3) Does the business have favorable long term prospects?

The freight rail industry is in a good position to continue to at least remain solvent in the future.  Goods will need to be transported through rail services until we can fly significantly heavy amounts of materials at a lower cost.

4) Is management rational?

Mortimer B. Fuller III, Chairman and Chief Executive Officer, is one of the primary reasons G&W is operating today.  It was his vision and devotion to his great grandfather’s railroad that helped the company survive in the 1980s and grow to its current state.  Yes, we believe management is rational.

5) Is management candid with its shareholders?

Genesee & Wyoming has a very nice investor relations page and shows no sign of not being candid.  The site also includes some pages for rail-fans (not necessarily relevant for the investor, but fun to check out anyway)

6) Does management resist the institutional imperative?

We see no evidence to suggest that the management has done anything but resist the institutional imperative.  How easy would it have been for Fuller to just take the pay and let the company die?  The management cares about the company and acts accordingly.

Financial and Value Review

Defensive:

1) Size of firm

With a market cap of less than $2 billion, the company fails this test.

2) Strong financial condition

With a current ratio under 2, the company fails this test.

3) Earnings stability

The company has achieved a positive net income for over 10 years, and passes this test.

4) Dividend record

The company does not pay a dividend.  Fail.

5) Earnings growth

Earnings have not grown sufficiently over the last 10 years.  Fail.

6) Price to earnings analysis

With a PE ratio (using our Methods) of 16.37 and a trailing 12-month PE ratio of 8.66, the company passes this test.

7) Price to assets analysis

Since the PB ratio is 2.18 and the multiple of the PB and PE ratios is less than 50, the company passes this test.

Overall

The company only passes 4 out of the 7 required tests and is thus unsuitable for the defensive investor.

Enterprising:

1) Strong financial condition

Since the current ratio is above 1.5, the company passes this test.

2) Earnings stability

The company has earned a positive net income for over 5 years.  Pass.

3) Dividend record

The company does not currently pay a dividend.  Fail.

4) Earnings growth

Earnings are not greater today than they were 5 years ago.  Fail.

Overall

Since the company only passed 2 out of the 4 tests for the enterprising investor, it is not suitable for this type of individual.

Valuation:

Our valuation model gives a fair value of about $34. 

Opinion:

Though this company is currently fairly valued (allowing for a margin of safety), we do not believe it to be suitable for the defensive or enterprising investor following a modernized Benjamin Graham value investing strategy.

Neither of us held a position in at the time of publication.  Also, please read our disclaimer and Our Methods.

This is the sixth part of our study of the Rail Transportation sector.  Please come back in the next couple weeks for the following articles:
Monday, January 8 – Jon – Burlington Northern Santa Fe (BNI)
Tuesday, January 9 – Ben – Union Pacific Corporation (UNP)
Wednesday, January 10 – Jon – Kansas City Southern (KSU)
Thursday, January 11 – Ben – Providence & Worcester Railroad Co (PWX)
Monday, January 15 – Jon – The Greenbrier Companies (GBX)
Tuesday, January 16 – Ben – Genesee & Wyoming Inc. (GWR)
Wednesday, January 17 – Jon – Canadian National Railway (CNI)
Thursday, January 18 – Ben – Norfolk Southern Corporation (NSC)
Monday, January 22 – Ben – Overall Industry Analysis & Introduction of Next Industry


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