GATX has been treading water for the past six months, recording a small return of 4.1% while holding steady at $177.67. The stock also fell short of the S&P 500’s 12.4% gain during that period.
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 cautious about GATX. Here are three reasons you should be careful with GATX, plus one stock we’d rather own.
1. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
GATX historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3.8%, lower than the typical cost of capital (how much it costs to raise money) for industrials companies.
2. 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 $4.82 billion of cash over the last year, and its $12.63 billion of debt exceeds the $741 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 17.1× forward P/E (or $177.67 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re fairly confident there are better stocks to buy right now. Let us point you toward a dominant aerospace business that has perfected its M&A strategy.
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