GATX has had an impressive run over the past six months as its shares have beaten the S&P 500 by 10.3%. The stock now trades at $192.56, marking a 13.8% gain. This performance may have investors wondering how to approach the situation.
Is now the time to buy GATX, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is GATX Not Exciting?
We’re glad investors have benefited from the price increase, but we're cautious about GATX. Here are three reasons there are better opportunities than 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 100,593 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 58.4%, meaning it lit $58.42 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. High Debt Levels Increase Risk
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’s $12.73 billion of debt exceeds the $4.98 billion of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $1.02 billion over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. GATX could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope GATX can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
GATX’s business quality ultimately falls short of our standards. With its shares topping the market in recent months, the stock trades at 18.5× forward P/E (or $192.56 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
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