Genesee & Wyoming (GWR) was the worst-hit rail stock in its peer group in 2015. If you look at the last year, the company has fallen by roughly 32%, the most in its peer group.
All rail stocks rallied in February 2016 on account of expectations of the economy’s ramp-up and stability in commodity prices in the second half of 2016 and beyond.
As you can see in the above graph, after its Freightliner Group acquisition in March 2015, GWR’s valuation premium fell sharply compared to those of its peers. For a substantial part of the last five years, the company has enjoyed a premium against its peers.
With the turn in the commodity cycle and the closure of mines served by GWR, things started reversing. GWR’s president and CEO Jack Hellmann said in 4Q15, “I mean of course in terms of timing when one makes an acquisition, watching a piece of its business evaporate within three months – or six months to nine months rather isn’t normally what you want to have happened.”
GWR’s peer group includes CSX (CSX), Norfolk Southern (NSC), Kansas City Southern (KSU), Union Pacific (UNP), Canadian National Railway (CNI), and Canadian Pacific (CP). Since February 2016, the peer group has seen valuations inching toward five-year highs.
US-originated railroads are included in the portfolio holdings of the SPDR S&P Transportation ETF (XTN).
Forward PE ratio
The forward PE (price-to-earnings) multiple indicates how many dollars investors are ready to pay today for one dollar of earnings in the next year. GWR trades at a forward PE ratio of 17.6x against the peer average of 16.6x. This translates to a premium of 6%.
The forward PE multiple of the S&P 500 Index, representative of the broader market, is 17.65x. This almost equates to the company’s current forward PE ratio, indicating no premium or discount.
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. This was quite high compared to its peer group.
GWR is the only rail company in its peer group whose revenue-to-total debt multiple is less than 1. At the end of 2016, the company anticipates a net debt-to-EBITDA ratio of 3.4x.
With the recovery in iron ore and manganese prices going forward, investors may see some turnaround in GWR’s stock price. Plus, any announcement of a sizable acquisition in the near future could boost GWR’s stock.