Gene Marcial's Stock Picks August 25, 2009, 5:13PM EST

Marcial: Time to Hop Aboard Genesee & Wyoming?

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BW's Gene Marcial

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Genesee's second-quarter results, reported in early August, fared better than many of its Class 1 peers and came in close to Street expectations, says Barnes. "We like the Genesee & Wyoming story in the near and long term, and we feel the valuation is at a very attractive level," he says. Barnes also expects more robust future sales growth, which should, he says, drive further expansion of the company's price-to-earnings multiple, given its ability to make and integrate acquisitions. He notes that Genesee has had a successful track record in acquiring assets, and he expects the company, which recently raised some $92 million from a secondary stock offering, to make another acquisition.

plenty of cash

As investors continue to look for early-cycle plays in railroads, "we should see significant investor interest" in Genesee, the analyst says. Despite the company's appeal, it still has a long way to go on the upside, says Barnes. The stock is down 3.9% year-to-date, he notes, vs. the gain of 11.2% in the Standard & Poor's 500-stock index, and it trails the performance of its Class 1 peers. Since the end of the first quarter, Genesee's stock is up 37%, vs. gains of 72.5% for CSX, 47.9% for Union Pacific (UNP), and 40.1% for Norfolk Southern. The relative underperformance surprises the analyst because results in the recent quarter have not been as bad as those reported by bigger rivals, reflecting Genesee's leaner cost structure and the benefits of acquisitions.

Genesee's financials are strong, says Art W. Hatfield, analyst at investment firm Morgan Keegan (it has done banking for the company), as the railroad operator continues to generate "solid free cash flow of $23 million thus far in 2009, and maintains a healthy balance sheet, with more than $62 million in cash." Hatfield rates Genesee outperform, based on his increased earnings estimate of $1.50 a share (up from an earlier $1.48) for 2009, $1.77 for 2010, and $2.16 for 2011.

Despite Genesee's small size, with a market cap of just $1.3 billion and revenues of $601 million (vs. No. 1 U.S. railroad Burlington's value of $28.5 billion and revenues of $18 billion), the company still has fans on Wall Street. Five of the 10 analysts covering the company recommend buying the stock, and the five others tag it a hold.

At least one institution remains on board. As of July 31, 2009, Baron Funds, which remains Genesee's top shareholder with 3.5 million shares, or a 10.5% stake, continued to add to its holdings. It bought 250,000 more shares in July.

With an economic rebound in the offing, and the stock attractively valued vs. the bigger players in the industry, shares of Genesee may chug along nicely in coming months.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.