A Rock-Solid Rail

 | Jan 14, 2013 | 10:30 AM EST  | Comments
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One of the secular trends I cover often here is the impressive ramp-up in energy production in the U.S. Driven by improving shale technology, domestic oil production is on track to grow to some 8 million barrels a day by the end of the year -- up from around 5 million barrels a day in 2008. This development carries many positive catalysts for high-yielding energy-infrastructure plays. For instance, the volume of oil transported by rail has risen more than 40% in 2012, which drove my recent recommendation of American Railcar Industries (ARII).

Another beneficiary of this increase is GATX (GMT), which is the second-largest lessor of railcars in the world. 50% of the company's volume is in tank cars, such as those used to move oil from the shale regions to refiners, and it has just under one-quarter of the tank-car leasing market. The company also has very deep relationships with its customers: The average tenure of its top 10 customers is more than 50 years.

GATX is probably one of the oldest companies most investors never have heard of. The firm has been around since the late 19th century, and it has paid a continuous dividend since 1919. Tank cars are an interesting business, too. Almost no tank cars are owned by railroads; they are owned by the lessors (78% of all tank cars) or shippers, mainly because of the complex maintenance and regulatory requirements these transport vehicles demand.

The business is also surprisingly recession-resistant -- GATX maintained a leasing rate of almost 96% right through the depth of the recent financial crisis. It is also maintaining an above-96% leasing rate in Europe, even with the current economic challenges there.

Here are four reasons GATX offers solid value at $46 a share:

● Analysts consistently underestimate the firm's earnings power. The company has easily beat earnings estimates for five straight quarters. Moreover, during that streak, it exceeded consensus by an average of more than 20%.

● Even though the company is more than 100 years old, only five analysts cover the stock -- but Stifel Nicolaus did just upgrade the shares to Buy last week. If GATX continues to beat estimates, I would look for further upgrades down the road.

● In the meantime, investors are collecting a solid dividend with a 2.6% yield. Given that the stock is selling at around 6x operating cash flow and that earnings are on a nice trajectory, I would look for that dividend to increase over the next year.

● GATX has a reasonable five-year projected reading for its price-to-earnings ratio relative to growth -- 1.11. Earnings are climbing nicely, as well. The company made just more than $2 a share in 2011, but its full-year 2012 EPS is tracking toward $2.75. Analysts have around $3.25 penciled in for 2013.

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