3 Reasons GATX is Risky and 1 Stock to Buy Instead

Although GATX (currently trading at $160.32 per share) has gained 10.3% over the last six months, it has trailed the S&P 500’s 15.6% return during that period. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in GATX, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.

Why Is GATX Not Exciting?

We're sitting this one out for now. Here are three reasons we avoid GATX and a stock we'd rather own.

1. Inability to Grow Active Railcars Points to Weak Demand

Revenue growth can be broken down into changes in price and volume (for companies like GATX, our preferred volume metric is active railcars). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Over the last two years, GATX failed to grow its active railcars, which came in at 101,288 in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests GATX might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Cash Burn Ignites Concerns

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

GATX’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 56.6%, meaning it lit $56.65 of cash on fire for every $100 in revenue. This is a stark contrast from its operating margin, and its investments in working capital/capital expenditures are the primary culprit.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

GATX burned through $531.5 million of cash over the last year, and its $9.03 billion of debt exceeds the $696.4 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the GATX’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of GATX until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

GATX isn’t a terrible business, but it isn’t one of our picks. With its shares lagging the market recently, the stock trades at 16.7× forward P/E (or $160.32 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. Let us point you toward one of our all-time favorite software stocks.

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