Greenbrier: Order Activity Remains Healthy

Written by Jason Seidl, Matt Elkott and Elliot Alper, Cowen and Company
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William C. Vantuono photo.

We hosted virtual investor meetings and a group call with Justin Roberts, Greenbrier’s Vice President Corporate Finance and Treasurer. North American demand remains solid, and the production ramp-up appears set to occur without additional disruptions. In Europe, the Ukrainian conflict seems to have caused transitory headwinds, which, we believe, could create noise. We remain constructive but are slightly cautious in the near term.

In North America, things appear to be unfolding largely in line with the company’s expectations: Order activity remains healthy; external disruptions, while still happening, may prove to be less detrimentally impactful than they were in fiscal 2Q, when COVID-19 variants caused 10%-12% of the workforce to be out from December to mid-January. Aside from COVID-19, access to labor appears reasonable in Mexico, where the company manufactures most of its railcars for the North American market. While the eventual ramp-up of the automotive industry in that country could create additional competition for labor, GBX’s manufacturing facilities are far from most automotive plants, although the company may have to compete with its railcar counterpart Trinity. We continue to model for sequential production increases of 6.3% and 7.8% in fiscal 3Q and 4Q for GBX, along with gross margin improvements, although the risk to our 3Q delivery and gross margin assumptions may be a bit more elevated, now given the Europe disruptions.

The Ukrainian conflict appears to have disrupted business flows somewhat and created transitory headwinds to railcar orders and operations overall on the continent. GBX’s European manufacturing facilities are located in Poland, Romania and Turkey. Europe constituted 7% of total company assets in FY21. Non-U.S. revenues, which include the remainder of North America, South America and Europe, were 30% of the total. We believe such disruptions could create noise in the fiscal 3Q results, causing us to be neutral to slightly cautious in the near term. That said, Roberts appeared confident that underlying demand remained solid in Europe, and that operational fluidity and order flows should normalize.

We asked Roberts if he senses that North American order activity could tick up even further if steel prices ease. He appeared to think so and suggested that much of the current order inflow is coming from buyers who need cars, not so much from strategic buyers, such as lessors, who are more apt to wait out the steel price momentum. We are modeling industry orders of 56,500 units this year with an assumption that steel moderates gradually, resulting in a material order increase in 2H22. We are projecting deliveries of 42,700 units this year, reflecting a book-to-bill ratio of 1.3, and 55,400 units of delivery in 2023, reflecting a book-to-bill ratio of 1.1.

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