Stock Value Finder

In my search for value I wanted to provide some visibility into a company I’ve been watching for a while, a railway holding company Genessee and Wyoming (GWR).  GWR buys and holds short line railroads throughout the world with operations mainly in the United States and Australia.

I have had GWR on my radar for the past year and a half without ever purchasing a share.  Looking at the company again I’m starting to believe that GWR has a lot of growth potential that is not priced into the shares yet.  In this post I wanted to detail general factors which make this company attractive as well as any items which might cause hesitation.  In future posts I plan on working out the financial details of GWR.

Positive Factors: 

• GWR used to own a railroad in Southern Mexico that was badly damaged in a hurricane.  GWR was having trouble dealing with the Mexican government to repair the rail line.  GWR recently announced that the Mexican operations were sold off.  The Mexican operation was contributing to a $.10/sh yr loss.
• Genessee and Wyoming has been paying down their debt.  Their debt level is also very nice and manageable.  I really like to see companies eliminating debt levels.
• GWR is sitting on a large cash surplus from a railroad sale.  This money gives them the ability to make a sizable aquisition that might add value.
• Management has initiated a 2 million share repurchase plan.  Share repurchase plans don’t usually catch my eye because they’re currently the popular thing to do on Wall Street.  GWR is a little different, the reason for the repurchase is that the company believes the Street is not recognizing the full value of the company, so if no one else will buy their shares, they will buy them back themselves.
• On it’s own a share repurchase plan, even if the company states they’re undervalued might not be much more than blowing smoke.  But in the case of GWR there is insider buying to support this claim.   Here is a link detailing recent transactions.  I like that management is backing up what they say by putting their own money on the line.
• I like the GWR management’s disciplined acquisition approach.  Management is willing to sit on their money while waiting for the right opportunity.  Many management teams are short-sighted and look to acquire quickly to pass any value created (or in most cases destroyed) onto shareholders.  GWR is willing to wait, and take the long-term view.

Negative Factors

After so many positive factors about the company noted above it might be hard to believe I have anything bad to say about Genesee and Wyoming.  I do have a few negative points to balance things out.

• No dividend..  This is a big item for me, a dividend signals that management believes they can sustain the current level of profitability and grow in the future.  I will still consider companies that don’t pay dividends, but I like to have something in my hand at the end of the day for being a part owner in the company.  That said GWR has offered share dividends in the past.  The jury is still out on whether or not stock dividends are of any value to shareholders.
• Falling traffic levels.  GWR is after all a railroad company and they make their money by loading and hauling railroad cars from point A to point B.  For the past few months carloadings have been falling for GWR.  This could possibly indicate lower future profits.  This is definitely an item to keep an eye on.

Conclusion

Overall there are many things to like about Genesee and Wyoming, they are a well run company with a lot of growth potential in the future.  Mainline Class I railroads are spinning off shorter lines to improve profitability and GWR has the expertise to run those lines and turn a profit.  Rail is developing as an alternative transportation method now that oil prices are climbing again, and GWR is positioned to take advantage of that change.

Disclaimer:  I do not hold a position in Genesee and Wyoming (GWR). 

As most stock watchers have noticed by now Discover (DFS) has been hit by a large amount of selling since the spin-off.  I think the sell off is occuring for a few different reasons.

Morgan Stanley shareholders don’t want it

Many shareholders of Morgan Stanley might have purchased their shares because they wanted a piece of the investment bank and they have no interest in the payment card industry.  This could be true of individual investors and also mutual fund investors.  An investor who understands Morgan Stanley’s business model might not understand the Discover business model and decided to sell off.

Last quarter earnings

As most investors know the Discover earnings last quarter were less than expected.  This factor could be spooking investors into selling off.  There is a perception in the market that Discover is the ugly step-child credit card company and the bad earnings only reinforced this impression.

Momentum selling

As the price of Discover drops I am sure many investors who owned Morgan Stanley and don’t know anything about Discover are getting panicked and out of fear are selling off.  It been on a downward trend since the spinoff.  Many investors and traders tend to focus on the short term instead of taking a long term view, and in the short term this stock has been a dog.

Final Thoughts

For investors who want to think long term I believe Discover has plenty of room to grow.  Now that Discover is independent they can focus on their growth and gaining marketshare.  As many investors know Morgan Stanley was hesitant to spin off Discover, and only did it because shareholders forced the issue.  Morgan Stanley was content holding onto the Discover cashflow, which historically has been pretty steady.

I believe at this price Discover could be considered a bargain, but only for investors who are content buying and forgetting about it for a year or two.