Railroading Profit
Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Transport sector has held its ground despite the limping economy, it's resilience a suggestion of better times ahead despite what headlines might suggest. A pick up in Transport activity is generally a sign of improving business conditions; and new highs in transport stocks is a good lead for gains in Industrials and Consumer Discretionary sectors and the broader economy as a whole.
Within the Transport sector, a stock which recently managed to clear the congestion is American Railcar Industries (NASDAQ: ARII). The stock popped on July 27th following comments made by the CEO on Q2 earnings. The maker of specialty tank and hopper railcars has enjoyed sustained revenue growth throughout 2011, turning what was an EPS loss of -0.37 in Q4 2010 into a regular earnings beat of +0.63 for Q2 2012. In addition, the company has regularly beat estimates with a Q3 analyst projection of +0.69 (compared to +0.54 for the quarter passed). This is a stock which has consistently delivered performance to investors.
Ironically, the growth in profits has been driven by Transports bugbear, the Oil and Gas sector. The need to transport liquid fuels accounts for 72% of the current railcar Industry backlog in North America for tank railcars. This is good news for American Railcar given its specialty, but also a cautionary tale as evidence by the dramatic fall in the stock's price as oil prices soared in 2008.
The company has a number of competitors: Greenbrier Companies (NYSE: GBX), Trinity Industries (NYSE: TRN) and privately held Union Tank Car Company. In Q2, American Railcar shipped 2,200 railcars, over double the number shipped in the same quarter last year. Similar quarterly improvements were reported by Greenbrier, shipping 4,500 railcars against 2,200 the previous year. While both smaller companies were able to outpace Trinity Industries 5,425 railcar shipments against its comparable quarter 3,150. American Railcar has a tank car capacity of 4,000-5,000 (hopper facility runs 5,000 to 6,000) with a suggested industry capacity of 20,000 tank railcars, so it's unlikely American Railcar will run up against its production capacity. Further comments from the CEO suggested it won't be until Q3 until railcar production reaches maximum efficiency, so even if orders were to remain static, increased efficiency will mean lower costs. In terms of managing inventory, American Railcar has done a good job of controlling finished goods inventory, the bane of any manufacturer, while maintaining inventory of raw materials to feed future demand.
Outside the Energy sector, the hopper rail car business remains in flux. Leasing is a consistent earner for all companies. Further afield, American Railcar is looking at the production pellet hopper cars as a prospect for 2013. Trinity Industries moved into wind towers, before converting back to tank production. While Greenbrier meddles in marine barges. Certainly the earnings driver is the liquid energy sector, but it's a bit of a one trick pony.
American Railcar is on top end of the P/E scale at 18.6 compared to Greenbrier's 8.0 and Trinity's 11.2. However, American Railcar employees contribute $272K revenue per staff member compared to $300K of Greenbrier and $276K of Trinity. Employee costs are one of the largest costs faced by a company and these ratios are fairly comparable. So the higher evaluation of American Railcar may be attributed to it being one of the purest plays in the tank railcar area. With room to grow and increases in production efficiency due in Q3, there should be more price growth left in the tank.
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