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Why Is Genesee & Wyoming’s Valuation Low Compared to Peers?

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Genesee & Wyoming’s valuation premium

Genesee & Wyoming (GWR) has fallen almost 40% in the last one year. The company had a net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) multiple of 3.7x at the end of December 2015. Compare this with the Class I railroads’ average of almost 1.75x, and you’ll see why the stock has tumbled. In fact, GWR is the only railroad whose revenues-to-total-debt multiple is less than any in its peer group.

GWR had a total debt of $2.3 billion versus revenues of $2.0 billion as of December 31, 2015. In its press release on February 24, 2005, the company estimated a combined entity debt of $2.2 billion.

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As you can see in the above graph, for a reasonable period in the last two years, GWR enjoyed a premium against its peers. With the turn in the commodity cycle and the closure of mines served by GWR, things started reversing. The peer group includes CSX (CSX), Norfolk Southern (NSC), Kansas City Southern (KSU), Union Pacific (UNP), Canadian National Railway (CNI), and Canadian Pacific (CP).

The above companies are a portfolio holding of the SPDR S&P Transportation ETF (XTN). This ETF holds 13.3% in these companies, including Genesee & Wyoming.

Current headwinds

Freightliner’s approximate revenues of $785 million make up more than one-third of GWR’s total revenues. On the other hand, due to the nature of its short-line operations, adverse weather conditions affect Genesee & Wyoming more specifically. Since it spans 75% of the United States, its operations are more vulnerable to natural disasters.

Weather can affect the quantity of a particular good shipped, if not the services directly. For example, mild winters may lead to less coal consumption and, in turn, less coal freight opportunities for GWR. Due to depressed iron ore prices worldwide, the pressure on iron ore transportation increases for the company.

Catalysts going forward

On a positive side, investors should watch GWR’s deal making within the sector. It will most likely drive its shares higher. If the commodity cycle reverses in 2016, the company will be a direct beneficiary. A quick look into GWR’s past activities shows that acquisitions have, by and large, proved accretive to the bottom line.

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