Second-quarter results for regional short-line operator Genesee & Wyoming (NYSE:GWR) weren't perfect, but they were still pretty solid. As we've heard from rail operators like Canadian National (NYSE:CNI), Burlington Northern Santa Fe (NYSE:BNI), and even Union Pacific (NYSE:UNP), demand for rail shipments is still exceptionally strong in nearly every region.
Genesee & Wyoming saw North American revenue grow more than 25% in the quarter. Growth was split almost exactly between organic same-rail growth and growth from acquired rail lines. With no clear weak spots, the company enjoyed healthy 12.9% growth in same-rail freight revenue. Paper and forest-product shipments increased notably.
Less positively, the railroad saw its operating ratio increase by about 100 basis points, to 82.7%. Remember that operating ratio is essentially 1 minus the operating margin, so higher ratios mean shrinking margins. Sure enough, those margins endured a 200-basis-point decrease due to fuel costs, and a 100-basis-point drop due to higher casualty and insurance costs. I'm not overly worried about this, though, and I don't think it marks the end of the company's ongoing margin improvements.
Australia continued to be challenging for the company. Revenue climbed more than 5%; freight revenue was basically unchanged, but non-freight revenue rose more than 30%. While grain shipments were down again, increases in iron ore and bauxite/alumina shipments helped offset that shortfall. The operating ratio here also worsened (84.2% vs. 79.9%), and operating income fell about 18%. On Genesee's income statement, the company recognized $2.3 million in equity earnings from the Australian business, down from $3.5 million last year.
Even though this quarter wasn't the best I've seen from Genesee & Wyoming, I wouldn't jump off this train just yet. The North American business is poised for continued profitable growth, and the Australian business should improve in the second half of this year and into the next. The stock isn't dirt cheap, but I think investors can still make a satisfactory return from these shares.
For more railroad musings:
- Burlington Northern Steams Ahead
- Good Days for Canadian Pacific
- Union Pacific Along for the Ride
- On the Right Canadian Track
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
