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American Railcar (ARII) Upgraded To 'Neutral' By UBS Securities On Improved Risk/Reward

 April 30, 2012 01:30 PM

(By Balachander) American Railcar Industries Inc. (NASDAQ:ARII) shares were upgraded to "Neutral" from "Sell" by UBS Securities on improved risk/reward. The brokerage also raised its price target on the stock to $27.00 from $17.00.

"We have been impressed with management's execution this upycle, and will look for signs that railcar orders could outpace our expectations and lead to further upside surprises," UBS analyst Jason Feldman wrote. "That said, ARII remains a high-amplitude cyclical stock (and we believe EPS could peak in 2013), so while we see less near-term risk of an adverse surprise, we caution against a more bullish stance."

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Feldman sees near-term risk to results as unlikely given 1) steady production levels, 2) an improved margin profile and 3) healthy order activity will likely lead to a sequential increase in 2Q12 backlog.

"ARII delivered a strong 1Q as the margin profile (gross margin +420bp qtr/qtr on flat deliveries) is better than we had forecast. While allowing for some qtr/qtr variability, we see margins as sustainable near-term, and a healthy backlog gives visibility to sustained production levels at least through early 2013," the analyst said.

Reflecting improved margins and backlog, Feldman raised its 2012E, 2013E and 2014E EPS to $.2.25, $2.50 and $2.35, from $1.40, $1.80 and $1.50.

Assuming April deliveries in line with 1Q run rate (~733 deliveries/month), YTD book-to-bill looks healthy at 1.42. With near-term production slots filled, improved margin profile and healthy orders, the analyst expects solid 2Q results.

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ARII shares, which have been trading in the 52-week range of $13.68 to $32.12, added 0.30 percent to trade at $27.04.



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