FreightCar America: Cheaper And Safer Than Peers
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FreightCar America (NASDAQ: RAIL) manufactures railroad freight cars, supplies railcar parts, leases freight cars through its JAIX Leasing Company subsidiary, and provides railcar maintenance, repairs, and management through its FreightCar Rail Services, LLC subsidiary. FreightCar America designs and builds coal cars, bulk commodity cars, flat cars, mill gondola cars, intermodal cars, coil steel cars and motor vehicle carriers. It is headquartered in Chicago, Illinois and has facilities in the following locations: Clinton, Indiana, Danville, Illinois, Lakewood, Colorado, Grand Island, Nebraska, Hastings, Nebraska, Johnstown, Pennsylvania, and Roanoke, Virginia.
FreightCar America is the leading North American manufacturer of coal cars and has an industry leading share of the aluminum railcar market. Management estimates that it has manufactured approximately 79% of the coal cars delivered from 2009 to 2011 in the country. Its BethGon railcar has been the leading aluminum-bodied coal car sold in North America for nearly two decades. Notwithstanding the near term downward pressure on coal prices from low natural gas prices and slow industrial growth, the long term outlook for coal is stable. The U.S. Energy Information Administration's Annual Energy Outlook published in April 2012 estimates coal's share in electricity generation in 2035 to be 39%, down slightly from 42% in 2011, and remain the largest source of U.S. electricity generation through 2035. In addition, an aging coal fleet drives ongoing replacement opportunities for FreightCar America. The estimated overall average age of the coal fleet is twenty years, with the average age of steel cars (primarily Eastern service) and aluminum cars (primarily Western service) at thirty years and eleven years respectively. There is also a shift from steel to aluminum and hybrid coal cars driven by railroad and shipper economics. Aluminum cars are light and allow shippers to load more products and generate more revenue per car.
FreightCar America has also successfully expanded into new car types to serve the needs of the aggregate and intermodal markets such as the VersaFlood aggregate hopper car and the DynaStack 53 three-unit double-stack intermodal car introduced in the past 2 years. Fueled by growing North American consumption and the Panama Canal expansion, the intermodal market has achieved a 7.3% CAGR in loadings since the bottom of the recession and represented 35% of loadings and 18% of revenues for Class I railroads on average between 2006 and 2010.
FreightCar America formed a new railcar parts, repair, maintenance and maintenance management business segment in 2011 to diversify its revenue and income sources, and to insulate itself from the cyclical nature of freight car manufacturing. Repair and maintenance services accounted for only 6.7% of FreightCar America's 2011 revenues. It is expanding capacity at existing locations to maximize facility utilization, to capitalize on the increase in demand for repair and maintenance services. An aging national fleet which requires maintenance and new technologies increasing frequency of railcar repairs will create new opportunities for FreightCar America in the growing freight car and coal car repair and maintenance market, which are estimated at $1.8 billion and $500 million respectively.
Valuation and Financial Analysis
FreightCar America currently trades at a trailing twelve months P/E of 9.9 and trailing twelve months EV/EBITDA of 3.0. In terms of asset based valuations, its current 1.3 times P/B represents a 10% discount to its five year average P/B of 1.5. FreightCar America achieved a trailing twelve months ROE of 14.0% and a five year average ROE of 3.6%.
In the last seven years from 2005 to 2011, FreightCar America delivered positive free cash flow in five of these seven years with a single year of loss in 2010. It has low margin stability, with gross margin fluctating wildly from 6% to 15% in its last six profitable years, reflecting the cyclical nature of the industry. FreightCar America has a strong balance sheet with no debt outstanding and net cash and short term investments representing 45% of its current market capitalization. It stopped paying dividends after 2009, before reinitiating dividend payment in 2012 and currently sports a dividend yield of 1%.
FreightCar America has three listed competitors in the North American railcar market that primarily manufacture railcars for third-party customers, which are Trinity Industries (NYSE: TRN), The Greenbrier Companies (NYSE: GBX) and American Railcar Industries (NASDAQ: ARII). All four of them including FreightCar America achieved similar trailing twelve month ROEs of 12%-13%, but FreightCar America is significantly cheaper and safer. Its three listed competitors have debt-to-equity ratios ranging from 50% to 150%, while FreightCar America is debt free. FreightCar America is trading at three times EV/EBITDA, half the valuation multiples of its listed competitors, as Trinity Industries, Greenbrier Companies and American Railcar Industries trade at six to seven times EV/EBITDA.
FreightCar America faces significant customer concentration risk, as a result of the nature of the industry where railcars are typically sold in the form of large, periodic orders. Most of its individual customers place orders for products on an as-needed basis, sometimes only once every few years, since they do not need to replace, replenish or increase their railcar fleets on a yearly basis. FreightCar America largest customer accounted for 53% and 63% of its 2011 and 2010 sales respectively.
FreightCar America's current supplier for roll-formed center sills for its railcars, primary longitudinal structural components of railcars which help withstand the weight of cargo, is its sole supplier. Any disruption in roll-formed center sills from this supplier could adversely affect FreightCar America's business.
As of Dec. 31, 2011, FreightCar America's pension obligations were underfunded. Its accumulated benefit obligation under defined benefit pension plans exceeded the fair value of plan assets by $14.1 million. It also had collective bargaining agreements with unions representing approximately 46% of its total active labor force, and an unfunded $65.1 million accrual for its projected retiree health care costs.
FreightCar America boosts of cheaper valuations and a stronger balance sheet than its listed competitors, despite delivering similar trailing twelve months ROEs.
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