Greenbrier ‘Ready for a Railcar Demand Recovery’: Cowen

Written by Matt Elkott, Transportation OEM Analyst, Cowen and Company
Matt Elkott, Cowen and Company OEM Transportation Analyst

Matt Elkott, Cowen and Company OEM Transportation Analyst

At Cowen and Company, we expect North American railcar demand to recover in 2021. One of the best-positioned suppliers? The Greenbrier Companies (GBX), with more than a 40% manufacturing share following the acquisition of ARI. Railcar markets in Europe and Brazil are also improving. All of this plus the cost-cutting measures GBX has taken make it our top 2021 pick.

GBX should post progressively improving earnings performances in fiscal year 2021, following what we expect to be a meager first quarter. Our FY21 EPS estimate of $1.62 remains unchanged, but our calendar year 2021 EPS estimate changes to $2.89, from $2.71. Our price target rises from $33 to $41. This is based on our new CY21 EPS estimate and a 14x multiple, which is up from 12x, reflecting improving market conditions as well as GBX’s enhanced competitive position and strong balance sheet, including $842 million of cash at the end of August.

What Is Under-appreciated or Misunderstood?

Frac sand cars and dated flammable liquid tank cars optically inflate the industry utilization headwinds. While GBX’s fiscal 1Q21 results are likely to be challenged, we estimate the book-to-bill ratio to improve in each fiscal quarter, from 0.55 in 4Q20 to 1.52 in 4Q21.

The resiliency of the industry-wide capacity rationalization by the Class I’s as part of PSR (Precision Scheduled Railroading) has not yet been tested in a sustained growing traffic environment and could lead to service hiccups in 2021. Some of the capacity rationalization by Trinity Industries Inc. (TRN) and GBX is likely to be permanent.

We expect railcar demand to recover next year, and Greenbrier is well-positioned to be a key participant. Valuation remains compelling. We rate Greenbrier as “Outperform.”

Catalysts and Milestones to Watch

Industry railcars-in-storage results in early January could show another decrease—an improvement. The number has declined meaningfully for five consecutive months, from approximately 526,000 units in July to about 428,000 units in December. The January reading, which we see as a possible positive catalyst, will likely come out just a few days before GBX’s fiscal 1Q21 earnings, on which we are somewhat cautious. Other catalysts include rail traffic growth in the mid-to-high single digits next year; potential rail service hiccups that could drive equipment demand in the winter months; supply agreements with key lessors; and possible tax subsidies for railcar scrapping.

What Are the Risks?

The biggest part of the bear thesis may be despite consistent improvement since July, the number of railcars in storage remains high at 428,000 units, or 26% of the fleet, implying some 74% utilization. But we note that well in excess of 50,000 cars in storage are likely frac sand cars and dated flammable liquid tank cars with very well-documented headwinds. Additionally, we see full utilization as being in the 85%-90% range.

Poised to Navigate a Post-COVID-19 World?

We believe that due to the rolling nature of the coronavirus infection apexes, GBX’s international diversification could help mitigate the blow of the pandemic somewhat.

Greenbrier recently reported FY4Q20 results, which Elkott called “solid.”

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