GATX currently trades at $175.78 per share and has shown little upside over the past six months, posting a small loss of 4.5%. The stock also fell short of the S&P 500’s 12% gain during that period.
Is there a buying opportunity in GATX, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is GATX Not Exciting?
We’re passing on GATX for now. Here are three reasons you should be careful with GATX, plus one stock we’d rather own.
1. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, GATX’s margin dropped meaningfully over the last five years. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business. GATX’s free cash flow margin for the trailing 12 months was negative 228%.
2. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative 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.
3. 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 $4.69 billion of cash over the last year, and its $12.33 billion of debt exceeds the $747.2 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 doesn’t pass our bar. With its shares trailing the market in recent months, the stock trades at 16.8× forward P/E (or $175.78 per share). This valuation multiple is fair, but we don’t have much faith in the company. We’re pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at the most dominant software business in the world.
Stocks We Would Buy Instead of GATX
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