Railcar Producers and Leasing Companies

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When Warren Buffett substantially bolstered his holdings in railroad companies with the November 2009 purchase of Burlington Northern, he sparked interest in a cyclical industry that had nearly hit rock bottom. Looking back, it was outstanding timing, as, for example, the value of sector stocks such as Union Pacific and CSX have risen more than threefold since that time. 

At the same time, some companies that are complementary to the railroad industry have also made for nice stocks, and might continue to be favorable holdings. Specifically, a railcar manufacturer, The Greenbrier Companies (NYSE: GBX) and GATX (NYSE: GMT), a railcar leaser, both offer price upside potential.

Unfavorably, Greenbrier's outlook for railcar deliveries in 2013 was most recently at 13,000 units, down from the 2012 total of about 15,000. That 2012 figure reflected a 60% jump from the prior year. Thus, business remains strong but less robust than a year ago.

The slowdown in demand has spurred management to take steps necessary to shore up productivity. It is aiming to bring operating costs in line with sales, and should benefit from margin expansion in the near term.

Furthermore, Greenbrier is redeploying cash to higher-return investments. It promises a wider-margined product mix. The overall backlog, though down from last year, rose from November to February, to 11,700 railcars from 9,700.

The factor that piqued my interest in this stock initially was its low P/E valuation and railroad industry presence. Investors will have to endure subdued profit comparisons for now. But, gross margin expansion ought to result from cost-cutting initiatives and return-on-capital is apt to climb thanks to debt paydown and share buybacks. In all, the stock, recently at an all-time high, is worth a look at this time. 

GATX's profits growing thanks to sharp rate hikes 

GATX is primarily a leaser of railcars in the U.S. and Europe that had previously been restrained by weak asset utilization that was limiting rates. Conditions have improved significantly, allowing for pricing increases on a year over year basis of more than 30% in the last two quarters. Renewals are now being contracted at more lengthy terms and utilization remains strong. All of this should result in share-earnings growth upwards of 10% this year.

Earnings are likely to demonstrate enhanced stability behind the higher rates and extended terms. The possibility that overcapacity, stemming from excess expansion in the oil market, will again be a hindrance is muted by this strategy. GATX is up against pipeline operators in the market for crude oil transportation and will probably lose share, due to the greater efficiency of that mode of storage.

The selloff of GATX shares due to a first-quarter share profit that fell well below forecasts shouldn't deter investors. One-time nonoperating items were partly to blame for the shortfall. GATX is booked through much of 2014 and into 2015 at record rates. Note that maintenance expense increases of about 10% this year will limit profit growth but the impact should subside over time. GMT stock is worth considering for the long haul.

Trinity Industries (NYSE: TRN) moving full steam ahead

The conversation would not be complete without mentioning diversified manufacturer and service provider Trinity. Its manufacturing arm is thriving behind volume and rate increases with regard to railcars. In fact, in contrast to Greenbrier, Trinity is anticipating increased sales levels in 2013 by a range of 6% to 13%.

As for its leasing business, it too is reporting rising terms and lengths allowing for profit gains. Increased demand from the oil/gas and chemical sectors is being offset by a slowdown from its agricultural and coal customers. 

In combination with other operating divisions (railcar-related units contribute about 70% of total revenues), profits are on track to grow by leaps and bounds in 2013. Energy Equipment, for instance, is another growing business unit. A downside to the stock and what might be holding it back is its sizable debt balance. Nevertheless, Trinity plans to further expand its railcar fleet through a net investment of around $550 million this year. TRN shares may be considered for their near-term price appreciation potential, or as a long-term holding. 

Riding the Railcars

Like the rail transporters, railcar manufacturers and leasing companies' fortunes are tied to the broader U.S. economy. More importantly, though, what sets these stocks apart at this time is their strong fundamentals along with positive earnings prospects. Value investors might want to take a look at the sector at this time, in light of contracted valuations. 

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Damon Churchwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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