Railcar manufacturers

[tucker]

American Railcar Industries (ARII)
Recent Price: $29.02
Revenue: $646mil
Market Cap: $616mil
EPS: $1.67
Shares Outstanding: 21.2mil
P/E: 17.38
Avg. Volume: 126,562
Dividend: $0.12
Book Value: $11.78
Yield: 0.40%

American Railcar operates both in the original manufacture and repair and refurbishment of freight carriers in North America. The company makes both specialty and general use cars, and specializes in cars for the transport of agricultural products, cement, and dry granular products including soda ash and clays. The company’s foundries in Ohio and Illinois also manufacture railcar components for sale to other railcar manufacturers.

? Carl Icahn controls 53% of Railcar’s stock and is the chairman of company’s board of directors. This could be a good thing – he is certainly a shrewd manager and investor. However, this coupled with Icahn’s role in some of Railcar’s key customers and suppliers means the company may be extremely dependent on Icahn’s continued involvement.

+ Analyst projected 5-year growth of 32%.

+ Backlog is increasing. Backlogs now represent 220% of 2006 revenues, and the company expects to convert 50% of those backlogs to revenue this year. That would result in a 10.4% increase in revenue from railcar manufacture.

+ Deliveries in 2006 were negatively impacted by a shutdown after a tornado damaged the company’s manufacturing facility in Marmaduke, Arkansas. With the facility on line all year in 2007, company should be able to top last year’s deliveries.

+ The company has recently broken ground on a new facility in Marmaduke, but the capacity of the new facility has not been disclosed. The facility is expected to go online in early 2008. It appears this has been factored into analyst growth projections.

= Current analyst rating is Hold.

- Forty-one percent of revenues came from a single customer in 2006. Icahn controls Railcar’s second largest customer, which accounted for 11% of the company’s revenue in 2006.

- Many analysts believe that the cycle for railcar orders has peaked. At least one of Railcar’s large contracts can be cancelled if backlog in the industry decreases beyond a certain point, but Railcar hasn’t disclosed which one that is. This adds an element of risk to the company’s orders.

- Facilities in Arkansas are not unionized, although some workers in Texas, Missouri, and Pennsylvania are. We may want to keep an eye on labor relations here.

- In 1994 the company purchased a manufacturing site from ACF. The company later discovered that the site was contaminated. Although ACF is liable for the clean-up, American Railcar will have to pay for the clean-up if ACF defaults. It is not known how expensive that might be. ACF is an important supplier to Railcar, and is also controlled by Icahn. This may effect negotiations between the companies. So far it appears that ACF intends to fulfill its clean-up requirements, but if that changes Railcar could incur materially significant costs.

If Railcar can achieve analyst projected growth over the next 5 years, it is certainly one of cheapest railroad stocks on the market. Fair current value based on projected earnings could be as high as $55 per share. However, the apparent value may be partially or fully offset by the high degree of risk the company faces.

Greenbrier Companies (GBX)
Recent Price: $27.53
Revenue: $1.01bil
Market Cap: $440mil
EPS: $2.09
Shares Outstanding: 16.0mil
P/E: 13.15
Avg. Volume: 425,897
Dividend: $0.32
Book Value: $13.88
Yield: 1.10%

Greenbrier engages in the manufacture and maintenance of railcars in the US and Europe, and manufactures oceangoing barges in the US. The company has maintenance contracts on approximately 145,000 railcars, and leases a fleet of 9,000 railcars to other companies. The company has manufacturing facilities in the US, Poland, Canada, and Mexico, wheel shops in the US and Mexico, 17 repair facilities (all in the US), and long term supply agreements with American Railcar in Ohio and Illinois and Zhuzhou Rolling Stock Works in Hunan, China.

+ In November of 2006 Greenbrier acquired Meridian Rail Holdings, a company specializing in wheel sets. Analysts expect Meridian to begin contributing to Greenbrier’s bottom line in 2007.

+ Stock currently has a high short ratio, which may bode well for the short term.

= Analysts currently give the company a mean rating of hold, although outlook is strongly polarized.

- Greenbrier’s manufacturing facility on the Willamette River in Oregon may have contributed to sediment contamination of the river. Greenbrier is cooperating with the EPA to investigate both the causes and solutions to this situation. It is not yet known how much this will cost.

- Greenbrier has been named as a defendant in a suit claiming that the failure of the company’s railcars caused derailments in Nebraska and Nova Scotia. The company does not believe the outcome of the case will materially affect its bottom line.

? Company missed its most recent quarterly earnings projections, and cut full year projected earnings from $3.10-$3.40 to $2.15-$2.40. This was partially due to production delays and inefficiencies in the introduction of a new line of railcars. However, revenue for the most recent quarter exceeded analyst expectations, increasing by 19% in manufacturing, 23% in leasing, and more than doubling in the refurbishment division. Thus, the long term outlook may still be positive.

Greenbrier’s P/E is at the low end of the company’s listed in this research. If the company’s earnings increase at 10% annually as expected and the stock eventually trades at a P/E of 15, an fair current price for the company might be $32.50.

FreightCar America Inc. (RAIL)
Recent Price: $48.08
Revenue: $646mil
Market Cap: $607mil
EPS: $10.01
Shares Outstanding: 12.6mil
P/E: 4.78
Avg. Volume: 269,057
Dividend: $0.24
Book Value: $16.15
Yield: 0.50%

FreightCar manufactures both conventional steel railcars and aluminum cars that are lighter and more fuel efficient. Although the company manufactures railcars for many uses, FreightCar’s specialty is coal carriers, for which it commands 80% of the global market. The company has manufacturing facilities in Illinois and Pennsylvania, and serves the South American market through a manufacturing partnership with Amsted Maxion in Brazil.

+ The company has announced a share buy-back of $50 million, which indicates that management believes the stock is undervalued.

+ The company has just completed a new production line in Roanoke, Virginia to manufacture specially design cola cars for Norfolk Southern.

= FreightCar has a strong command over its focal market in coal carriers, and thus may face less intense competition than some of the other companies in this research.

- Analysts currently rate the company a weak hold.

- The company has seen a decline in order backlog (while all of the other companies listed here have seen increases.

- FreightCar is the least diversified of any of the companies on this month’s research, and its earnings may be the most highly cyclical.

- FreightCar is trading with a very low P/E. However, forward P/E on projected earnings for 2008 is 17.17.

Based on three year projected growth of 3% and project 2007 earnings of $4.50, a fair current price for the stock might be near $48.50.


Trinity Industries Inc. (TRN)
Recent Price: $40.64
Revenue: $3.22bil
Market Cap: $3.25bil
EPS: $2.90
Shares Outstanding: 80.0mil
P/E: 14.00
Avg. Volume: 1,089,300
Dividend: $0.24
Book Value: $17.54
Yield: 0.60%

Trinity is the most diversified of the publicly traded railcar companies in the US. The company manufactures railcars and manages railcar fleets, manufactures inland barges, produces materials including guardrails and bridge supports for the highway construction industry, manufactures tanks for the petrochemical industry, and supplies structural towers to the wind power industry. Trinity serves the US and Mexican markets from manufacturing facilities in Pennsylvania, Texas, and Mexico, and the European market from its manufacturing facility in Romania.

*see attached Standard and Poors’ report, but:

+ Trinity does not appear to have outstanding environmental or civil liabilities.

Based on analysts projected growth of 12% and a five-year P/E goal of 15, a fair current price for the stock might be $49. This closely matches Standard & Poors’ valuation.

Westinghouse Air Brake Technologies Corp. (WAB)
Recent Price: $31.23
Revenue: $1.09bil
Market Cap: $1.53bil
EPS: $1.73
Shares Outstanding: 49.0mil
P/E: 18.08
Avg. Volume: 360,995
Dividend: $0.04
Book Value: $9.55
Yield: 0.10%

Wabtec does not manufacture railcars directly, but specializes in the manufacture of the more technologically demanding railcar components for other companies. Products include brakes; door systems for freight cars, busses and subways; commuter and switcher locomotives; heat exchange products for the transportation industry; and low volume toilets for busses and passenger rail. The company serves the global market with its manufacturing facilities in the US, Canada, and Mexico. Additional manufacturing facilities in Australia, Europe (Germany, Italy, France and the UK), China, and India serve local markets.

+ Wabtec manufacturer specialty components for railcars and mass transit vehicles, and faces less intense competition than some of the other companies in this research.

+ Wabtech trades at a higher historical P/E than railcars manufacturers. From the time Wabtec began to gain investor attention in 2003 until the end of 2005 the company traded with a P/E of close to 30, but over the past year it has settled back to below $20. This has been due mostly to an increase in earnings, since the price has not trended downward over the past 12 moths.

+ Analysts currently rate the company a buy, and project earnings growth of 15.5% over the next five years.

+ In February Wabtech announced record revenue and earnings for fiscal 2006, and backed projected earnings of $2.10 per share for 2007. The company beat analyst’s earnings projections by $0.03 for the final quarter of 2006, marking the fourth consecutive earnings overachievement.

+Wabtec appears to have no outstanding environmental liabilities.

- Wabtec is by no means the cheapest of the stocks in this research, trading with a P/E of 18.08.

- Wabtec has been named as a defendant in an asbestos exposure case. Exposure occurred at the manufacturing facilities Railroad Friction Products Corporation (RFPC). Wabtec currently owns RFPC, although they did not own the company at the time of the exposure. Wabtec believes it has insurance sufficient to cover all such claims, and does not believe that the outcome of the litigation will materially affect the company’s financial statement.

- Wabtec’s credit agreement restricts the company’s ability to pay cash dividends.

If Wabtec meets analyst growth five-year projections and the company eventually trades at a P/E of 15, a fair current price for the shares might be close to $36.03. However, given the company’s historical P/E, there may be upside to this projection. If the company eventually trades at a P/E of 18, a fair current price might be $43.24, and in an aggressive pricing scenario where the company eventually trades at a P/E of 20, a fair current price might be as high as $48.00.