(By Balaseshan S) Deutsche Bank analyst Justin Yagerman lowered its price target on shares of Genesee & Wyoming Inc. (NYSE:GWR) to $70 from $72 while maintaining its "Buy" rating, as operationally levered transports should outperform on strong Q1 reports.
Transports have generally been under pressure recently (and were punished amidst recent market turbulence) as investors have been selling the group due to rising fuel prices, sovereign debt concerns, and fears of slower economic growth. Yagerman is a buyer of the more levered transport companies into expected solid Q1 earnings.
The analyst believes the transports are poised to post solid Q1 earnings as weather, core pricing gains, and operating leverage should overwhelm the fuel cost headwind. He is most optimistic about the rails and UPS, which faced the easiest year-over-year weather comps in Q1 as their fixed cost networks should benefit meaningfully from the mild winter.
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Yagerman's sense is that the LTLs are better positioned than the TLs in Q1. LTLs will benefit more from weather, and higher fuel prices likely acted as a talwind for the LTLs due to their fuel surcharge mechanism versus a headwind for the TLs.
With few transports giving guidance the analsyt sees little risk to downward 2012 EPS revisions. However, given limited visibility and increasing market volatility, he expects volume outlooks to be conservative even as pricing is expected to remain strong.
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With a clouding economic outlook, Yagerman has created model transportation portfolios for different macroeconomic conditions to give investors a sense how he would position his universe under various scenarios.
While the analyst remains believer in the economic recovery and views recent market weakness as a correction, he would be remiss if he did not point out that several of his favorite freight indices have either rolled over (Cass and Ceridian) or have seen growth rates decelerate - U.S. economically sensitivity carloads (carloads less coal and ag).
Since the transports are a very macro-sensitive group, share performance is contingent on the economic trajectory and investors should adjust their transportation exposure if they have divergent expectations about the economy's near-term trajectory. Q2 comparisons get tougher before the second half comparisons ease.
The analyst said his price target of $70 is derived by applying a target price-to-earnings multiple on his 2013 EPS estimate discounted by 6% (down from 8%) to reflect cloudy visibility given macro uncertainty, geopolitical risk (oil & European debt crisis), and deleveraging.
Genesee & Wyoming owns and operates short line and regional freight railroads and provides railcar switching services in the United States, Australia, Canada, Belgium and the Netherlands. It operates a railroad that runs about 1,400 miles northsouth between Tarcoola in South Australia and Darwin in the Northern Territory of Australia.
GWR is trading up 1.07% at $53.04 on Monday.