Cowen and Company’s Matt Elkott and Jason Seidl (Railway Age’s Wall Street Contributing Editor) spent a couple of days “on the road” in Portland and Seattle with Greenbrier Assistant Vice President Corporate Finance/Assistant Treasurer Justin Roberts. Following is their report.
“We came away with our favorable long-term view of the company reinforced. One risk to our constructive opinion is the potential for protectionist trade policies with Mexico, although GBX is working on two fronts to proactively address this contingency.
“Roberts acknowledged that overall railcar demand remains low but did not seem to think that further deterioration from here would be significant. While he refrained from calling the bottom for order declines at current levels, he did not appear to rule out the notion of a demand trough.
“One of the more encouraging signs in the industry as of late has been an elevated level of inquires into railcars, most recently pertaining to frac sand covered hoppers. This is as frac sand traffic appears to be headed close to the record levels seen during the energy boom, driven by a partial rebound in energy prices and the use of higher sand volumes per well. Cowen oilfield services analyst Marc Bianci projects an improvement from ~40 million tons in 2016 to ~70 million in 2017 and ~85 million in 2018, which compares to 2014 demand of 55-60 million tons.
“The improved outlook for frac cars is consistent with channel checks we performed recently with senior managers in the railcar leasing division of a large commodities company. They noted an uptick in demand for the equipment and suggested lease rates could finish the year up as much as 40% from today’s depressed levels. We are encouraged by these trends but note that it could take well over a year for the idle supply of frac sand cars to come out of storage, even if the commodity recovery continues. There are currently an estimated 350,000 railcars in storage industry-wide, most of which are crude tank cars, coal cars, and frac sand cars.
We believe GBX’s valuation discount to peers is no longer fully warranted as the company’s execution has improved materially over the past couple of years. The improvement is attributable in no small part to the company’s evolution to a much more diversified model with a stronger balance sheet and more robust cash generation.
“Roberts highlighted GBX’s market share gain within its railcar manufacturing business. The company’s share of the industry backlog grew from roughly 13% in 2006 to 33% at the end of 2016. GBX has historically been an intermodal and boxcar manufacturer but has grown its product portfolio to include just about every type of railcar, except coal cars, which are likely in secular decline despite a potential tailwind in the near term (GBX does not participate meaningfully in other types of open hoppers, which could be a missed opportunity). The company’s decisions to enter new railcar markets have been for the most part timely and effective.”