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Is Renaissance Technologies Going for the Long Haul?

May 01, 2014 | About:

One mode of transport making a strong come back is the train. Rising gasoline prices have ignited a move away from freight trucking, especially visible in North America, where railroad operators continue to see cart demand increases. Most important for North America, a record wheat harvest has added an additional stress to the service. Such is the pressure placed upon railroad and terminal operators that new legislation had to be sanctioned, in order to organize train freights for the next couple of years. Also, recovering industrial activity means the recovery of coal and coke.

In that line is that railroad operators have also recorded a higher demand for freight carts. Companies registering the latest trends in Canada are Canadian National Railway (CNI) and Canadian Pacific Railway (CP). But, competitors across the frontier like CSX Transportation (CSX) and Norfolk Southern (NSC) have also described the same patterns. Let us look at a short line and regional freight Genesee & Wyoming (GWR) to find whether the trends offer rewards to shareholders.

Absorbing Market Trends

Besides the small ups and downs experienced in the market, Genesee & Wyoming has been on the uptrend since 2009. Most impressive has been the performance accomplished during the last year and a half, especially during the second half of 2012. It is there where the conservative, not pessimistic, analyst opinions lay. Only Zacks has gone so far to rate the stock “Underperform,” and lower the target price simultaneously. All other financial institutions expect the stock to retain a face value above the $100 mark.

The highlight for Genesee & Wyoming during 2013 is the successful integration of Rail America. Other important achievements relate to the safest operational record in the industry, and a 50% increase in adjusted diluted earnings, and use of record cash flow for the payment of more than $200 million in debt. Operations in Australia have hauled a record 11 million tons or iron ore, while back in North America the company reached an agreement with Canadian Pacific Railway for the acquisition of 670 miles of railroad across South Dakota, Minnesota, Wyoming and Nebraska.

When looking more closely at the 2013 report for Genesee & Wyoming, one can tell the Rail America acquisition is not fully responsible for the growth reported. From continuing operations, revenues were up 10% year-over-year, driven by a 5.8% increment in the number of total carloads, and an additional 4.2% increment in average revenue per carload. Hence, it becomes evident the effective absorption of market trends by the current and expanding business model.

Rollover Seasonal Disruptions

As reported by many Canadian railroad operators, weather conditions have affected Genesee & Wyoming’s activities as well. The disruption of several operating regions, ended in a reduction of diluted earnings per share by an estimated $0.23 to $0.26 from a combination of lower revenues and higher operating costs. Nonetheless, total operating revenues increased 0.4% to $376.3 million, while reported income from operations decreased 1.7% to $74.9 million for the same period year-over-year.

The first upside to Genesee & Wyoming is the increasing demand for crude-by-rail transportation in North America. Another important growth catalyst is the identification of several resource-mining projects along its FreightLink rail corridor in Australia. Most important for continued expansion is the announced acquisition of the Dakota, Minnesota and Eastern Railroad from Canadian Pacific Railway. In conjunction, they will offer the company a long-term profitability as activities continue to be guarded by a narrow, but capable economic moat.

Trading at 20.8 times its trailing earnings, Genesee & Wyoming carries a 6% premium to the industry average. Moreover, the company splits quarterly dividends in a 3:2 fashion, while registering one of the highest revenue and net income growth during the last three years. Most important, Renaissance Technologies and Steven Cohen (Trades, Portfolio) have purchased the stock every quarter throughout 2013. Hence, it is recommended to keep this stock in mind for a prosperous long-term investment.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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