“All four publicly traded railcar builders reported top-to-bottom first quarter misses, with our Outperform-rated Trinity (TRN) and Greenbrier (GBX) enjoying positive post-earnings stock reactions, while not-rated American Railcar Industries (ARII) and FreightCar America (RAIL) saw their shares decline and seem to now be contributing to pressure on TRN and GBX,” said Cowen and Company analyst Matt Ellcott on May 4, 2016.
“This is something we view as a unique buying opportunity for patient, long-term investors in these two market leaders.“ noted Ellcott. ”Not all misses are created equal. Global growth concerns, a pullback in energy prices, and lackluster results by ARII and RAIL, which brought an end to railcar earnings season on April 26, placed the sector under pressure in the past two days, with RAIL down 13% on its results and TRN, GBX, and ARII down roughly 6%, 8%, and 2%, respectively, this week. We believe the weakness is not fully warranted for our Outperform-rated TRN and GBX, two much more diversified companies that enjoyed positive reactions to their below-expectations earnings on April 22 and April 6, respectively, affirming our view that most of the industry headwinds were more or less reflected in share price levels. TRN received orders for 1,620 railcars in the quarter, compared to our 1,800 railcar estimate; GBX received orders for 3,000 railcars during its fiscal 2Q16 quarter, in line with our estimate; ARII received orders for 200 new railcars, while RAIL had 496 cancelations.”
“We believe TRN is the best positioned in the space to weather the ongoing industry contraction,” Ellcott said. “The company has the highest level of diversification both in its railcar segment and overall product portfolio. Additionally, at more than 40% of the current industry backlog and minimal remaining exposure to crude-specific tank cars and frac sand cars, the company’s pricing pains and order cancelation risk should compare somewhat favorably to the remainder of the industry.
“Indeed, while order postponement and conversions have almost certainly occurred and may continue to do so, the roughly 6,000 railcars canceled recently from the industry backlog (mostly frac sand cars) do not seem to include TRN equipment. GBX also has a highly diversified product mix. It manufactures all major railcar types except coal and currently has about 30% of the industry backlog, with only 17% of that having direct energy exposure. The company, which in 2006 had just 13% of the total industry backlog, tends to see its market share gains pick up somewhat during a down cycle, and this may prove true in the ongoing contraction as GBX attempts to solidify its role in the plastic pellet market.”