Genesee & Wyoming Rides Rail Buyouts, Shale Plays


Genesee & Wyoming ( GWR ) isn't on the same scale as major U.S. railroad companies such asCSX ( CSX ),Union Pacific ( UNP ) andNorfolk Southern ( NSC ).

But since it gained control of peer RailAmerica in January, G&W runs the largest network of short-line railroads in the U.S.

The rail company is a big deal in Australia, too. From a 2010 acquisition, G&W gained the 1,400-mile Tarcoola to Darwin rail line, the only one that bisects the country north to south, through the central region's natural resources-rich interior.

It's a good time for railroads, especially in North America, where they are increasingly moving crude oil from shale plays.

In addition, the U.S. housing recovery means more shipments of building materials and related products.

"The vast majority of rails touch the (housing) supply chain at some point," said transportation analyst Kevin Kirkeby of S&P Equity Research.

The U.S., which is in the midst of a housing recovery, accounts for 70% of G&W's revenue, Australia 20% and Canada 10%.

A tiny fraction of the total comes from Europe, where G&W serves the Port of Rotterdam in the Netherlands and the Port of Antwerp in Belgium.

Transformation Buy

The recent RailAmerica acquisition was "transformational," says Wells Fargo analyst Anthony Gallo.

G&W gained 45 railroads in the deal. It had equity financing backing fromCarlyle Group ( CG ), the private equity firm, which owned 11% of the company's shares as of the first quarter.

RailAmerica was taken public in 2009 by majority ownerFortress Investment Group (FIG).

"Before the RailAmerica acquisition, we thought the most upside opportunity was based in Australia," Gallo said. "But then a light went on for many of us and we said this (RailAmerica deal) could be interesting."

First of all, he says, it would reduce G&W's exposure to Australia at a time when growth in demand for its natural resources from China seems to be slowing.

"Some of that natural resource demand may wane a bit," Gallo said. "That doesn't matter as much as it used to because it has RailAmerica."

And not only does RailAmerica double the company's North America revenue base, it also boosts earnings power. Management is cutting duplicate expenses, such as back-office functions, for one thing.

Greater scale also might mean better deals with suppliers, operating synergies and pricing power.

The company wants to spread its good safety record to the newly acquired railroads.

And since its footprint is bigger, it has more opportunities to buy contiguous rail lines, analysts say.

At a recent transportation conference, CEO Jack Hellmann said the firm expects to benefit from at least $36 million in cost synergies.

Analysts expect earnings to go up 70% this year over last year to $4.63 a share, according to a poll by Thomson Reuters.

In the first quarter, which was the first to include RailAmerica, earnings jumped 71% to 89 cents a share. Total operating revenue grew 81% to $375.2 million.

Combined same-railroad operating revenue was up 7.6%.

G&W dates back to the 19th century. But for decades it was barely known outside western New York state, where it ran one 14-mile railroad serving a salt mine.

Its name stems from two counties in that region: Genesee and Wyoming.

It wasn't until 1985 that expansion began in earnest, with some 36 deals made since then.

G&W now operates 111 railroads worldwide in 11 regions. In the U.S.' southern region alone, it runs 18 railroads, including the Columbus & Greenville Railway and Eastern Alabama Railway.

In the Northeast, there are six, among them the Buffalo & Pittsburgh Railroad, Rochester & Southern Railroad and the Connecticut Southern Railway. The California Northern and San Joaquin Valley railroads are among a handful in the Pacific region.

What G&W carries is widely diverse: coal, petroleum, steel, iron ore, lumber and forest products, pulp and paper, autos and agricultural products.

G&W's traffic in April grew 103% over the earlier year to 157,695 carloads. The biggest spikes were in petroleum products, up almost 70%, followed by metallic ores at 29.5% (mostly iron ore in Australia), lumber and forest products at 17.7%, and autos and auto parts at 15.6%.

"They're seeing growth in petroleum from shale plays, especially in the Bakken," said Gallo.

Railroads are increasingly moving crude oil from shale plays in Canada and North Dakota's Bakken Shale to the East. G&W hauls crude in both the West and Gulf Coasts.

Coal, which was off about 20% last year, usurped by the pull of low prices for natural gas, was up 2% this year through April. Since natural gas prices have recently risen, management expects coal to be up about 4% for the year as the cheaper fuel gains some favor again.

Growth in autos is especially good for profits, Kirkeby says. "They are high-value shipments that require special carrier cars. It's a good margin business for the rails."

Despite China's slowing industrial demand, Australia still has plenty of steam for G&W as new and expanding mines along its rail line ramp up.

And intermodal rail shipments of stacked containers of consumer goods from Adelaide in the south of Australia to Darwin in the north are also doing well.

Northern Territory

"The northern territory of Australia is growing very strongly," Hellmann said during the recent conference, sponsored by Bank of America-Merrill Lynch.

He pointed to a growing economy and population due to offshore gas deposits in the north, as well the U.S. Marines' presence.

G&W's intermodal traffic, which stems from Australia, rose 19% through April. Some of the gain was due to easy comparisons from last year, when floods caused a bridge to wash out.

Hellmann said a big operating priority is related to the iron-ore ramp-up in Australia from new and expanding mines.

And while RailAmerica's integration is its "No. 1 priority," Hellmann said the firm remains on the prowl for more acquisitions. It has more than $400 million available to do so.

"There are still hundreds of independent railroads in North America out there," Gallo said.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: CG , CSX , GWR , NSC , UNP

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