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The Greenbrier Companies, Inc. (GBX): Get Along, Sweet Little Stock, Get Along

 January 08, 2013 01:00 PM
 


(By Rich Bieglmeier) The Greenbrier Companies, Inc. (GBX) is running higher today on news "it is meeting robust demand for new railcars in North American and European markets with orders for over 4,200 units valued at over $430 million since the start of its current fiscal year which began on September 1, 2012." Of which $160 million is for higher margin tank cars thanks to "Continued strength in North American shale energy markets."

Shares are up 5.27% on the day and could have plenty more room to move higher as industry experts believe the auto and energy boom will continue to deliver double digit growth for the rail car industry. Perhaps, that's why the railroad sector tagged our emerging bull list in this week's sector performance review.

[Related -Stocks Tumble Amid 'Cliff' Impasse; Research In Motion (RIMM) Slumps]

According to the company's CEO, William A. Furman, "We have also responded to the spike in demand for tank cars for the energy market, targeting an annual build rate in North America of about 3,800 cars per year by December 2013.  The increased rate of tank car production will drive higher volumes and margins in our manufacturing segment, especially in the second half of our current fiscal year." The main man added some color, "During our 2012 fiscal year, production of tank cars was approximately 1,000 units.  We expect to be building over 300 tank cars per month at the end of this calendar year."

The updated sales report could reduce the discount GBX trades at versus industry norms. In November, we wrote, Greenbrier's shares have room for multiple expansion as many key metrics are below the industry norm. Of course, discounts are the result of under-performance within the financial statements.  Relative to the industry, GBX management needs to increase their gross and operating margins as they lag the peer group. Greenbrier's gross margin stands at 12% and operating at 6%, against the industry average of 31% and 16% respectively.

[Related -Stocks End Higher Amid 'Cliff' Talks, Data; NYSE Euronext (NYX) Surges]

However, when compared to railroad peers, GBX trades for 25 cents for every dollar per share in revenue, whereas the industry trades at 1.64 times sales. [Carl] Ichan's new love has a trailing 12 month P/E of 9.21 versus the competition's 14.63. Based on future earnings growth, GBX's PEG ration of 0.72 looks attractive compared to 1.00 for the average railroad stock; although, both are attractive."

GBX crashed after closing at $20.61 on December 19, 2012. Three days later the stock closed 24.1% lower at $15.64. The price derailment was caused by management rejecting American Railcar Industries, Inc.'s (ARII) conditional proposal to acquire the Company for $22 per share. Calling it "unacceptable and not in the best interests of Greenbrier stockholders." Now we know why.

Shareholders will get more flavor before the market opens tomorrow when the company announces first quarter results before the market opens. Wall Street expects 31 cents per share on revenues of $ 400.42M. Our iEstimate stands at 30 cents, a potential 1 penny bearish surprise; although, Wall Street will likely pay more attention to forward guidance, which we expect to be revised higher than the current consensus of $1.88 for 2013. The degree will determine how long GBX's price can roll.

The railcar company's stock moved aggressively in the days surrounding the past five earnings announcements. In chronological order from latest to oldest, the price moved -16.6%, +12.7%, -6.5%, 10%, and 25.8%.

Today's, January expiration, option activity shows that speculators are betting on a good quarter. So far, 1,037 calls have traded in strike prices from $15 to $20. Meanwhile, put activity is about 16% of calls at 169 puts traded as we type. Open interest is a little more balanced with 4,918 calls and 3,406 puts. Contrarians might see the option activity as a reason to short GBX heading into its quarterly checkup.

Overall, risk-adverse investors might think about waiting for earnings to be announced and for updated guidance from management before stowing-away any dollars in The Greenbrier Companies, Inc. (GBX). Reading between the lines from today's announcement, iStock wouldn't be surprised to see management provide a cautious outlook for the 2nd quarter and perhaps a small miss for Q1's bottom line. Longer-term, it wouldn't surprise us to see Carl Icahn's American Railcar Industries take another swipe at GBX before the year is over, but at something significantly higher than $22 per share, especially if GBX's valuations move to par with the industry.

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