Wednesday, October 26, 2016

GBX stock slide "unwarranted": Cowen and Company

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GBX stock slide "unwarranted": Cowen and Company

Investors tend to be a fickle, knee-jerking lot, and when it comes to railroads or railroad suppliers, often clueless. Case in point: The Greenbrier Companies stock price taking a 6.52% hit after GBX posted a very solid fourth fiscal quarter and fiscal year 2016.

I’ll turn it over to analyst Matt Elkott of Cowen and Company, a colleague of Jason Seidl, Managing Director and our Wall Street Contributing Editor, for his take:

“Reaction unwarranted; Greenbrier is a unique entry point for long-term investors.

“A slight quarterly miss in a lumpy industry that’s in a down cycle should not have caused such a stock decline, in our opinion. More important, amidst challenging conditions, GBX reported solid orders and provided FY17 guidance largely in line with expectations, even excluding help from the recent acquisition. Payments for canceled cars support a ‘real-backlog’ narrative, and do not undermine it.

“GBX’s guidance is largely in line with expectations, so an upside cannot be ruled out. The $3.50 FY17 EPS guidance midpoint was in line with our estimate at the time of the release, which was slightly below the Street estimate, which had declined by about 5 cents over the last month to $3.55. The guidance midpoint for FY17 railcar deliveries was also in line with our model projection of 15,000 units. The revenue guidance midpoint of $2.2 billion was just above our $2.1 billion estimate. The company did not include in the guidance any accretion from the recent Astra Rail acquisition, pending regulatory approvals. We have no reason to believe the deal will face significant hurdles and expect it to be materially accretive, potentially as early as mid-FY17. However, the accretion is not reflected in our earnings forecast due to the lack of a definitive closing date.

“GBX received orders for 2,300 railcars in fiscal 4Q16, a solid level given the current environment and above our 1,900-unit estimate. Deliveries were 4,600 units, compared to our 4,900-unit estimate. This puts the railcar backlog at the end of August at 27,500 units, compared to our estimate at the time of the release of 28,200 units.

“Canceled railcars are not as alarming as some may fear. The settlement on 1,200 frac sand cars should not have come as a big surprise, as these units were part of the 5,000 homeless cars discussed by the company last quarter. Payments on these units are reflected in the company's FY17 guidance, underscoring the intrinsic value of the backlog during market volatility. The remaining 3,800 units do not appear to be at risk of cancellation at this point, although we would not rule out that other types of arrangements may have been reached.

“We are maintaining our FY17 EPS estimate of $3.50. Our $39 price target remains intact based on our unchanged Calendar Year 2017 EPS estimate of $3.47 and the same 11x multiple. We project that the ongoing North American railcar industry down cycle will be more prolonged, but less steep than previous ones, with a backlog trough in 2Q18. This underscores the importance of product and/or geographic diversification to soften the blow of industry contractions. GBX has focused on geographic diversification, embarking on investments in Mexico, South America, Europe and the Middle East. We believe this strategy will prove prudent over the long term, opening up new growth opportunities in emerging and frontier markets while potentially reducing cyclical risk. This could also broaden the company’s shareholder base by bringing on board more international investors.”

Interestingly, Norfolk Southern’s relatively solid third-quarter earnings elicited a similar response from Wall Street—a 3.47% drop from the prior-day close—and a similar reaction from our analyst-in-the-know, Jason Seidl—“We view Norfolk Southern’s results favorably and believe the negative reaction is unwarranted.”

As the late Tony Kruglinski was fond of saying when something of a financial nature didn’t quite make sense, “What’s going on here?”

The operative phrase in my mind is “unique entry point for long-term investors.” It seems as though most investors really don’t grasp that railroads and the companies that supply them are long-term plays. Warren Buffett gets it—that’s why he acquired BNSF.

SpockWant sound investment advice? Listen to analysts like Jason Seidl, Matt Elkott, or Tony Hatch. These guys know our business, inside and out. They’re part of it. They believe in it. They recognize its intrinsic long-term value.

I’m reminded of the time, many years ago, when I attended a CSX earnings presentation in New York City. It was around the time when the “railroad renaissance” was just getting under way. It was pre-Conrail split. CSX’s CFO at the time gave a presentation that outlined a significant increase in capital investment, compared to prior years. He described a wide-ranging program of capacity improvements and equipment acquisitions.

I remember feeling rather elated. “This is wonderful,” I blurted out loud enough for people sitting near me to hear. “It’s long overdue.”

I’ll never forget the negative reaction I got from one guy sitting in front of me, who—probably dressed in a $3,000 suit and hand-woven $700 silk tie—turned around and said quite disdainfully, “You must be a supplier.”

I didn’t say what was in my heart: “Screw you, you ignorant, greedy bastard” (or what my dad, who never used profanity, would have said: “Go jump in the lake, jackass”). Instead, I said something to the effect, “Railroads must invest if they are to live long and prosper.”

Logic clearly dictates that the needs of the many outweigh the needs of the few, or the one. That’s basically what railroading is all about.

Apologies to Leonard Nimoy.

















William C. Vantuono, Editor-in-Chief

With Railway Age since 1992, William C. Vantuono has broadened and deepened the magazine's coverage of the technological revolution that is so swiftly changing the industry. He has also strengthened Railway Age’s leadership position in industry affairs with the conferences he conducts, among them Next-Generation Train Control, Light Rail, and Rail Insights. He is the author or co-author or editor of several books, among them All About Railroading; John Armstrong’s The Railroad: What It Is, What It Does; Railway Age’s Comprehensive Railroad Dictionary; and Planning, Engineering, and Operating Light Rail, With Applications in New Jersey.

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