The price of oil and other commodities may be lower, but it sure doesn’t mean that the US is moving any less of the stuff across the country on the rails. And for that, you need a continuous supply of industrial-strength freight cars that meet the latest government safety standards.
That’s why Greenbrier Companies (GBX – Snapshot Report) has seen its business grow by leaps and bounds in the past few years, especially after high-profile accidents involving extra-flammable Bakken crude and other hazardous materials.
In fact, the Pipeline and Hazardous Materials Safety Administration (PHMSA) wing of the Department of Transportation is expected to rule this month on the implementation timetable of stricter rail car construction and “retro-fitting” requirements. More on this controversy in a moment. Home on the Rails
Greenbrier, located in Lake Oswego, Oregon, is a $1.7 billion leading supplier of transportation equipment and services to the railroad industry with four integrated business segments: 1) Design and manufacture of conventional, inter-modal, and petroleum freight cars in four plants in the U.S. and Mexico; 2) Repairs and reconditioning of wheel sets at 9 locations throughout the US; 3) Leasing and financing; and 4) Fleet asset management services. They even have a marine barge unit.
The company’s rail asset management platforms include proprietary software tools that address the ownership, use and maintenance of approximately 216,000 freight railcars. They help customers design customized solutions and then assist with tools and support, or deploy a team to run fleet management for them.
The Battle Over Freight Safety
It was believed the PHMSA timetable might be as short as 2 years for all required safety improvements such as reinforced-steel petroleum and chemical tank cars. This would certainly benefit manufacturers like GBX.
But on October 1, shares of rail car makers Trinity Industries (TRN – Snapshot Report) and Greenbrier were dropping hard in reaction to a request by the American Petroleum Institute (API) and the Association of American Railroads (AAR) for an additional year to retrofit old rail cars to transport, for instance, extremely flammable crude extracted from tar sands in Canada.
While API and AAR feel that unsafe rail cars could “harm consumers by disrupting the production and transportation of goods that play major roles in the economy,” Greenbrier went on record stating they believe the two-year time frame given for retrofits was “tight, but achievable.”
The fact that the regulator involved has given companies like Trinity and Greenbrier 2 years to make their rail cars safe to transport oil, while the API and AAR want to increase that to as much as 7 years, is creating the big uncertainty for these companies in terms of production schedules and backlogs.
But GBX CEO William Furman was adamant on last Thursday’s conference call that the PHMSA ruling wouldn’t have a negative impact on their business because industry demand was so strong looking out 2-3 years. He was also not concerned about dropping crude prices as this would be seen as a temporary blip 2-3 years from now. His optimism was reflected in the company guidance delivered last week.
The 60-day comment period for PHMSA’s comprehensive rulemaking proposal closed recently and we now await a final ruling by the department. There are about 3 options with timelines of 3-5 years. But the uncertainty is over whether the rule-makers will lean more toward 2 years or toward the API/AAR direction of pushing out safety improvements.
Another Strong Quarter and Guidance
On September 17, Greenbrier announced Q4 total railcar orders of 15,000 units (including 2,700 units announced on the Q3 call), worth $1.37 billion. The orders were broad-based across car types. Since the beginning of FY14, GBX has received orders for approximately 39,000 units valued at $3.72 billion.
The company also announced an order for a deck cargo barge, bringing total marine backlog to $112 million and ensuring barge work for the company through 2016.
On October 30, GBX reported their fourth quarter FY2014 results and posted in-line earnings and a 2.3% miss on the top line. But it was the guidance that reaffirmed the growth story. Railcar unit book-to-bill in the quarter was 2.17X (10,400 units booked vs. 4,800 billed), and at quarter-end, backlog stood at 31,500 railcars with a combined value of $3.33 billion.
That backlog number implies $106,000 per car vs. 26,400 railcars valued at $2.75 billion last quarter, which implied $104,000 per car. Management stated that less than 40% of the current backlog consists of tank cars. Subsequent to quarter-end, GBX booked orders for 11,400 units valued at $1.1 billion ($96,500 per car).
Management said they now expect deliveries in FY15 to exceed 20,000 units compared to consensus estimates closer to 19k. This is also compared to FY14 deliveries of 16,200 and FY13 of 11,600. With that kind of sales growth, you can see why GBX shares have quintupled in 2 years. And yet they still trade at 14X 1-year forward estimates. Here’s why…
The company believes revenues will exceed $2.5 billion and expects adjusted EPS in the range $4.25-$4.55 vs. the consensus before the report of $4.11. Analysts have quickly raised their estimates in the past few days and just happened to make the consensus fall right in the middle of company guidance at $4.40, implying EPS growth of 43% in FY15E.
The Long View
While GBX shares have been volatile lately due to the PHMSA process, some large investors continue to take a long-term view of the company in this part of the economic cycle where the transport sector is still gaining momentum.
In addition to Vanguard adding about 350,000 shares to bring their stake to over 1.8 million shares in Q2, the $21 billion Acadian Asset Management bought 586,058, increasing their stake by 271% to over 800,000 shares. As the SEC 13F filings roll in this week and next, we’ll see who else has been putting their money down on the rails.
Meanwhile, the Acadian buy told me that Greenbrier is still a solid and growing industrial small-cap I want to own as rail traffic keeps flying.
Disclosure: I own GBX shares for the Zacks FTM portfolio.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money Trader.