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Acquisitions Put Genesee & Wyoming Inc.'s Earnings Growth Back on Track

By Matthew DiLallo - Feb 8, 2017 at 1:02PM

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The regional rail operator continues to be active in the mergers and acquisitions market.

Genesee & Wyoming's ( GWR ) growth-by-acquisition strategy paid off during the fourth quarter as recent additions boosted results. The company also benefited from a noticeable pickup in rail volumes in both the U.S. and Australia, which helped offset weakness in Europe. These positives should enable the company to maintain its momentum in 2017, especially since it already has more deals in the pipeline and the balance sheet to continue buying.

Genesee & Wyoming results: The raw numbers

Metric

Q4 2016

Q4 2015

Year-Over-Year Change

Revenue

$516.5 million

$546.3 million

0.3%

Adjusted net income

$58.3 million

$56.8 million

2.6%

Adjusted EPS

$0.99

$0.98

1%

Data source: Genesee & Wyoming. EPS = earnings per share.

What happened with Genesee & Wyoming this quarter? 

Genesee & Wyoming closed several deals during the quarter:

  • North American revenue rose 7.9%, to $322.2 million. Driving that increase was an additional $17.6 million in freight-related revenue, due, in part, to the recognition of revenue from a multi-year take-or-pay volume shortfall from a crude-by-rail contract. The company also collected $5.2 million of revenue from the newly acquired Providence and Worcester Railroad, which closed in November. Meanwhile, good expense management drove an 18.9% increase in adjusted operating income during the quarter.
  • Revenue in Australia rose 11.2%, to $61.4 million, primarily due to the acquisition of Glencore Rail and the subsequent joint-venture agreement to partner its Australian subsidiary with Macquarie. Meanwhile, adjusted operating income surged 26.4% thanks to those transactions and the improvement of commodity prices.
  • The U.K./Europe segment was the lone laggard as revenue slumped 17.4%, to $133 million. However, $21.7 million of that impact was due to foreign-currency depreciation, which, if adjusted, reduced the decline rate to 4.5% year over year. Port congestion in the U.K. and lower intermodal volumes in Continental Europe drove the decline. These issues pushed adjusted operating income down from $9.1 million in the year-ago quarter to $2.5 million last quarter.
  • On an even more positive note, same railroad operating revenue would have increased 1.8% year over year after adjusting for acquisitions and the negative impact of foreign currencies. Driving this growth was a 2% increase in same railroad traffic in the U.S. and improving performance in Australia.
  • It's also worth noting that earnings would have been higher by $0.01 per share if it wasn't for the completion of an equity offering in mid-December. The company raised $287 million of cash to position itself for additional acquisition opportunities, including pre-funding the purchase of a $110 million container terminal in the U.K. that it announced in December. The company also announced a deal yesterday to acquire the Heart of Georgia Railroad, which connects with G&W's system in that state.
A long train loaded with double-stack white cargo containers winds its way around tight s-curves in mountain countryside.

Image source: Getty Images.

What management had to say 

CEO Jack Hellmann commented on the quarter by saying that:

The fourth quarter of 2016 was extraordinarily active at G&W as we closed on the acquisition of GRail in Australia, we closed on the acquisition of the P&W in the United States, we signed an agreement to acquire Pentalver in the U.K., and we raised $287 million of equity to position ourselves for additional acquisition and investment opportunities. Our reported diluted EPS for the fourth quarter of 2016 were $0.15 which included expenses related to the above transactions, as well as impairment and related charges in the U.K./Europe. At the same time, our adjusted diluted EPS of $0.99 included a $0.10 diluted EPS benefit from a multi-year take-or-pay contract. Excluding this benefit, our fourth-quarter results were consistent with our outlook as our business performed as expected.

Genesee & Wyoming has worked hard to take advantage of the slowdown in the rail sector to make acquisitions across the globe. The company completed two deals last quarter, signed another, and just yesterday agreed to a fourth transaction. While the recently closed deals clearly boosted fourth-quarter results, it's worth noting that its earlier deal for Freightliner has not paid off as expected.

Last quarter, the company recorded a series of charges relating to that U.K./Europe business, including the decision to discontinue some of its ERS Railways operations. The company is working on righting this business, with hopes of bringing it back to profitability by mid-year.

Looking forward 

Despite that misstep, Genesee & Wyoming is actively pursuing more deals. CEO Jack Hellman noted that the company continues to evaluate "multiple acquisitions and investment opportunities across" its global footprint. He pointed out that it has a war chest of more than $500 million of available credit under its revolving credit facility to finance future transactions.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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