The Engines That Can, and Are: Why Greenbrier Is a Buy
Greenbrier Cos. Inc. (NYSE:GBX) caught my attention after it absolutely trounced earnings estimates. This company isn’t exactly a household name, but it is well known to market veterans. The company designs, manufactures, and markets railroad freight car equipment in North America and Europe, and has done a marvelous job in an economy that continues to limp along.
Digging a bit more into the company, Greenbrier’s manufacturing segment offers double-stack intermodal railcars, tanks cars, auto-max railcars, multi-max auto racks, flat cars for automotive transportation, and conventional railcars such as boxcars, covered hopper cars, flat cars, center partition cars, bulkhead flat cars, and solid waste service flat cars. It also produces pressurized tank cars, non-pressurized tank cars, gondolas, coil cars, coal cars, sliding wall cars, and automobile transporter cars. Finally, it offers marine vessels like conventional deck barges, double-hull tank barges, railcar/deck barges, barges for aggregates, and other heavy industrial products and dump barges.
The company’s wheels, repair, and parts segment provides wheel services, including reconditioning of wheels and axles, new axle machining and finishing, axle downsizing, and heavy railcar repair and refurbishment, as well as routine railcar maintenance, repair, and refurbishment of railcars for third parties. This segment also reconditions railcar cushioning units, couplers, yokes, side frames, bolsters, and various other parts, as well as produces roofs, doors, and associated parts for boxcars.
Greenbrier’s leasing and services segment offers operating leases and “by the mile” leases for a fleet of approximately 8,600 railcars. It also offers management services, including railcar maintenance management, railcar accounting services, fleet management, administration, and railcar re-marketing. This segment owns or provides management services to a fleet of approximately 232,000 railcars.
The company’s customers include railroads, leasing companies, financial institutions, shippers, carriers, and transportation companies. The company doesn’t quite have a monopoly in the space, but it has few competitors. Competitors to note are the GATX Corp. (NYSE:GMT) and Trinity Industries (NYSE:TRN).
Both GATX Corp. and Trinity Industries are larger companies in terms of market cap than Greenbrier, which I like, because that means Greenbrier likely has a lot of room to grow. Further, Greenbrier is also cheaper on a price-to-sales basis. Greenbrier comes in at 0.83, while GATX Corp is 2.33 and Trinity Industries is 1.39. While the net income of GATX Corp. and Trinity Industries are higher than Greenbrier, I believe Greenbrier may be a better buy.
Let’s face the music here: Greenbrier is growing at a healthy clip. In its most recent quarter, net earnings attributable to Greenbrier were $33.6 million, or $1.03 per diluted share. This is more than double the second-quarter earnings per share of 50 cents. Adjusted EBITDA for the quarter was $78 million, or 13.1 percent of revenue.
Railcar backlog as of May 31 was 26,400 units with an estimated value of $2.75 billion (average unit sale price of $104,000), compared to 15,200 units with an estimated value of $1.54 billion (average unit sale price of $101,000) as of February 28. New railcar deliveries totaled 4,300 units for the quarter, compared to 3,400 units for the quarter ended February 28, while orders for 15,600 new railcars valued at $1.65 billion were received during the quarter.
After quarter ended, it is important to note that Greenbrier received orders for an additional 2,700 units valued at approximately $320 million. Further, the company’s marine backlog as of May 31 totaled approximately $110 million. Third-quarter aggregate gross margin reached 16.3 percent compared to 11.5 percent in the second quarter, and ahead of the company’s stated goal of a minimum 13.5 percent by the fourth quarter of fiscal 2014. Manufacturing gross margin also reached a record 17.3 percent in the quarter, driven by product mix, pricing, and production efficiencies
The company also pays a nice dividend. The board declared a quarterly dividend of 15 cents per share payable on August 5 to shareholders of record as of July 15. Greenbrier also repurchased 352,000 shares of common stock at a cost of $16 million during the quarter. To date, the company has repurchased 641,327 shares of common stock at a cost of $26.3 million under a $50 million share repurchase program. This will help boost earnings per share going forward and increases the potential for higher dividend payments.
Looking ahead, deliveries in the fourth quarter are expected to be between 4,300 units and 4,600 units, resulting in fiscal 2014 deliveries of 15,700 units to 16,000 units. Fourth-quarter revenue should increase 4 to 6 percent above third-quarter revenue of $593 million, resulting in annual revenue in excess of $2.2 billion. Finally, earnings per share, excluding restructuring charges for the fourth quarter, should in the range of 95 cents to $1.05. This company is chugging ahead quite nicely, and compared to GATX Corp. and Trinity Industries, the growth this company is delivering warrants a strong buy recommendation.
Disclosure: Christopher F. Davis holds no positions in any stocks mentioned and has no intention of initiating a position in the next 72 hours. He has a buy rating on Greenbrier Cos. Inc. and a $75 price target.