TD Cowen Insight: GBX Investor Day

(The Greenbrier Companies Photograph)

For The Greenbrier Companies (GBX), we see gradually subsiding volatility in revenue, margins and earnings over the next three to five years. This is as the company targets higher—albeit measured—lease fleet growth, and as the right-sized manufacturing footprint for GBX and the industry should mean less erratic annual builds.

We’re modeling for EPS of $3.68 in FY24. A path to exceeding the FY15 peak of approximately $6/share appears plausible in the long term.

GBX held its first investor day on April 12. Just the fact that management decided to address the investment community in a more formal setting after 29 years of being a public company (full roots traceable back more than 100 years) and provide long-term financial targets could bode well for existing shareholder confidence and possibly help to attract some longer-term investors who have not traditionally flocked to the story in large numbers.

Here are more of what we think are the evolving characteristics that could place the company under the watch of more long-term investors:

• The anticipated growth of leasing as a percentage of the overall business ($300 million of annual lease fleet investment in the next five years, up from $200 million, with both GBX-built cars and opportunistic secondary market transactions, all contingent on favorable return economics).
• An oligopolistic manufacturing industry that has consolidated further in recent years, with GBX having 30%-40% market share.
• The railcar manufacturing industry’s barriers to entry are higher than once thought.
• A stated long-term vision and financial targets.

Management appears to see the industry’s new peak capacity in a 60,000-70,000 car range, although, depending on the cycle type and number of line changeovers it requires, production could land just outside that range. The 2015 peak of 82,000 units may be a thing of the past. The industry has gone from 19 active production plants in 2000 to 11 today. We believe GBX’s share will continue to be in the 30%-40% range.

We see three key advantages to the industry’s reduced capacity:

1. Annual production swings should be less dramatic than in prior cycles, as unfulfilled demand from strong years could be accommodated in ensuing years of softer conditions. This should lower the volatility of the top line, margins and earnings.
2. Reduced capacity should mean improved pricing power for the manufacturers.
3. Reduced risk of overbuilding and consequently less lease rate dilution.

GBX estimates its worldwide capacity to be 33,000 units. For FY24, The company’s international markets appear to be set for production growth, while North America could be down somewhat. This could translate to largely flat total deliveries, which is consistent with our estimate.

GBX is targeting aggregate gross margins in the mid-teens by FY26 (our consolidated FY24 gross margin estimate is 12.6%, up from our FY23 estimate of 10.8%). Non-manufacturing activities should be key to achieving this goal. They contributed 4.4% and 6.3% in FY22 and FY21, respectively.

The company is targeting growth of +100% in annual recurring revenue from its leasing and management services segment in the next five years. It is targeting ROIC of 10%-14% by FY26.

Management appeared to agree that flammable liquid tank car replacement could accelerate in the next few years whether or not there is a mandate for moving up the regulatory timeline. There are at least 35,000 tank cars that need to be retrofitted or replaced but possibly as many as 50,000 units, according to management. GBX’s lease fleet does not contain a material number of flammable liquid tank cars that are not DOT117.

Our Recent Estimate Revisions

On April 10, we changed our fiscal third-quarter 2023 and fiscal fourth-quarter 2023 estimates to $0.60 and $0.89, from $0.97 and $1.17, respectively, in order to reflect an updated delivery cadence as fiscal second-quarter deliveries were significantly higher than our original expectations and likely the Street’s.

Our FY23 and Calendar Year (CY) 2023 EPS estimates of $2.53 and $3.60, respectively, remained intact. Our unchanged $47 price target is based on our CY23 EPS estimate and the same 13x multiple.

Also in our April 10 note we introduced our FY24 and CY24 EPS estimates of $3.68 and $3.60, respectively. We’re assuming largely flat production in FY24. We believe deliveries will be more predictable and have a more even cadence than the prior few years. We assume fewer line changeovers, better access to labor and components, and a somewhat higher mix of tank cars. All these factors should result in a less volatile manufacturing gross margin in the low double digits—our model reflects 10.0% for the full year, up from our 7.8% FY23 estimate. Our consolidated FY24 gross margin estimate is 12.6%, up from our FY23 estimate of 10.8%.

Fiscal 2Q23 Results (Released April 10)

The strong GBX results were driven primarily by:

1. Higher production (including timing of syndication activity).
2. Higher revenues in the maintenance services and leasing segments.
3. Improved operating efficiencies, which helped to drive a 50bps sequential manufacturing gross margin improvement.
4. Higher gains on asset disposition (approximately $0.19/share benefit relative to our model assumption).
5. GBX ended the quarter with $816 million of liquidity ($477 million at the end of the first quarter), including $380 million in cash ($263 million at the end of the first quarter).

The company repurchased 575,000 shares of stock for $17 million. $75 million of share repurchase authorization remains after the March activity. The Board declared a quarterly dividend of $0.27 per share, payable on May 16, 2023 to shareholders of record as of April 25, 2023, representing GBX’s 36th consecutive quarterly dividend.

Guidance provided in GBX’s April 10 earnings release: deliveries of 23,000-25,000 units including approximately 1,000 units in Greenbrier-Maxion (Brazil) and revenue at $3.4 billion-$3.7 billion.

Prior Guidance: deliveries of 22,000-24,000 units including approximately 1,000 units in Greenbrier-Maxion (Brazil) and revenue at $3.2 billion-$3.6 billion.