Cowen and Company’s Matt Elkott expects freight car builder The Greenbrier Companies (GBX) “to make strategic adjustments to position itself well amidst changing railcar dynamics, potentially through acquisitions.”
Elkott, a colleague of Cowen Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl, says that Cowen’s backlog forecast is “pillared on an extensive demand study and collaboration with Cowen research teams” and “calls for a prolonged but not precipitous contraction, to which GBX shares have been oversold, in our opinion."
“We are initiating research coverage of GBX with an Outperform rating and a $41 target,” said Elkott. “Our proprietary backlog forecast, ten-year correlation study, examination of historical execution and joint analyses with more than five Cowen research teams give us the conviction that GBX’s fundamentals remain solid, and that the stock has likely been oversold. The company’s 2009 entry into the tank car market earned it a ticket on the crude-by-rail (CBR) train, and we now expect GBX to shift some lines toward boxcars, where replacement demand is on the rise, and to establish presence in plastic pellet [covered hoppers], an effort that could be boosted by a potential acquisition. We would not rule out industry consolidation and believe GBX would gravitate toward a combination that would be complementary to its operations. While the company incurred some losses during the Great Recession, it has since transformed its infrastructure to a lower-cost, flexible-capacity model.”
“Our proprietary industry backlog forecast calls for a more protracted but less acute decline than in the past two major contractions,” said Elkott. “The extended duration aspect of our thesis stems from our view that many of the industrial headwinds are unlikely to abate materially in the near-to-intermediate term as well as our assumption that economic conditions will remain sluggish. Our assertion that the decline is likely to be less steep (a 56% peak-to-trough backlog drop) than the previous two major contractions (decreases of more than 80% each) is derived from three factors: 1: Both aforementioned contractions coincided with major recessions. 2: Equipment replacement demand related to certain depressed commodities should emerge in coming years. 3: We could see potentially faster recoveries in some commodities than many expect. Investors’ preemptive selling of the stock into the ongoing contraction has been much more pronounced than in past cycles, due in part to what we believe are overblown concerns about lower demand for crude oil tank cars, which are 10% of GBX’s backlog.”
Cowen is projecting 3% and 25% EPS declines in GBX’s Fiscal Years 2016 and 2017 to $5.90 and $4.45, respectively, “as GBX and the industry embark on the downward slope of the current industrial cycle,” Elkott said. “The stock is trading at discounts to railcar, leasing and industrial peers, as well as to its own historical averages. We are establishing a price target of $41 based on applying a 10.0x PE multiple to our Calendar Year 2017 EPS estimate of $4.50 and discounting the resulting price by 10% to embed consideration for a challenged environment.”