Genesee and Who???
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).
July 24th, 2007 at 5:30 pm
My exposure to the Genesee and Wyoming goes back over 50+ years to when I was 6 years old. I still remember the strange sight of that salt mine on the flat plains near the river in western New York state.
This is probably what started my lifelong interest in railroads and took me on to anvanced studies in transportation economics.
I have been an investor in the G & W for seven years and the company has done very well for me; this would put the cost basis at about $2.50 per share.
There are several errors and omissions:
1. The FCCM in Mexico was not owned by the G & W. They merely operated ithe railroad. If the G & W owned the track and bridges that were damaged, they would have insured the right of way and would have repaired the track and bridges that were damaged. The track connected through to Guatemala and had great potential for traffic, especially with the signing of the CAFTA accord. Guatemala stopped repairing their track because Mexico refused to repair its portion.
2. It is not traffic that produces profit, it is revenue and tax incentives. Traffic is down, but revenue is up because G & W raised their rates. The traffic for lumber and gravel is down because of a slowdown in housing - this will recover. The traffic in paper is down because of fewer people are reading newspapers. However, I was down on the Georgia Central operations on aturday and I did see several boxcar loads of newsprint and an increase in the tankcars of Kaolin for the quality paper being moved.
3. Many goverments realize the importance of taking bulk shipments of the highways and moving them by rail. They are wiling l to subsidize the improvement of right of way or providing other incentives, like forgiving real estate taxes.
4. The original G & W has new salt mines on line. The Dansville and Mount Morris has a new locomotive rebuilding shop on line. The Bay Line is going to get a new plant for processing wood chips for shipment to Europe. The Portland and Nortwestern is getting a new ethanol plant. Maersk is building a new container seaport on the Commonwealth Railway - they just added 2 new locomotives to this railroad in advance of the opening of the port. The Kansas City Southern and CSX are now using trackage rights over the Meridian and Bigbee.
5. When the embargo is lifted on Cuba the following G & W switching services will probably see heavier traffic in the following ports: Savannah, Brunswick, Fernandina, Jacksonville, Panama City, maybe Appalachicola, and Galveston.
6. The rock quarries in the Miami area are being closed because the mining operations are aledgedly polluting the Everglades. Where is the nearest large source of gravel that can be used in making cement? Near the Georgia Central.
Also, the G & W is a prime candidate to be privatized. I don’t want to see it, but it is part of the equation.
Disclaimer: I hold stock in the G & W, CSX, Seaboard marine that ships out of Fernandina , and Vulcan Materials that had their quarry closed.
July 24th, 2007 at 5:40 pm
Larry,
Thank you for the correction on the Mexican operations and the insights into G&W’s other operations. The items you posted are the type of things I love finding out about companies I’m researching. I usually start at the Annual Reports and search outwards from there, but the information you provided probably isn’t filed away anywhere. Other investor experiences and employee experiences are two things I love hearing about companies, it fills in the details to the story. Congratuations on your purchase at $2.50/share, GWR has done quite well for you, especially considering the market conditions at the time of your purchase.
I also think the growth prospects for GWR are fantastic. I think they have been hit hard by the housing boom, but they are well diversified limiting that impact. That being said as you mentioned gravel and lumber traffic levels will not be down forever.
One aspect you mentioned that I failed to take into consideration was their switching operations and the intermodal boom. Due to the increase of goods manufactured overseas the shipping industry is booming like never before. GWR switches the train cars at many of these ports, and will also see increased traffic levels.
As you can probably see from my posts and this comment I’m very close to buying into GWR. I have not done a deep analysis of the books yet, I still plan on doing that just to make sure there isn’t something hidden in the small print that would make me avoid them.
July 25th, 2007 at 12:13 am
Nate:
You might want to consider joining the following groups:
http://finance.groups.yahoo.com/group/asab_an_railway/
http://groups.yahoo.com/group/BPRR/
http://finance.groups.yahoo.com/group/GWI/
http://finance.groups.yahoo.com/group/georgiashortlines/
http://finance.groups.yahoo.com/group/pnwr
And looking at the following sites:
http://www.rrpicturearchives.net
try reporting marks of PNWR WPRR BPRR WPRR MBRR IMRR
Here is where I have posted some of my stuff:
http://www.rr-fallenflags.org/
Also, there is a book coming out on the G & W book, with me supplying recent pictures from the southeast railroads.
Larry
August 16th, 2007 at 1:17 am
I couldn’t understand some parts of this article Genesee and Who???, but I guess I just need to check some more resources regarding this, because it sounds interesting.
August 16th, 2007 at 1:23 am
Daniel,
What part of the discussion was confusing to you? I’m reading through the 10-Q currently, so if there were any confusing sections I can clarify them in the post I’ll make soon.
Nate
October 6th, 2007 at 12:47 pm
Thank you for sharing!
February 25th, 2008 at 9:53 pm
[…] posted about Genesee and Wyoming Railroad back in July of 2007. At that point in time I really liked the management outlook on the company and highlighted the […]