Is This Railcar Maker a Buy After Icahn's Offer?
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The famous 76-year old activist investor Carl Icahn got himself busy again at the end of 2012 with his plan to take over the railroad transportation equipment provider Greenbrier Companies (NYSE: GBX) for around $543 million, or $20 per share. The offer was only a 5% premium to last Monday's trading price of $18.97. Carl Icahn, who owned 56% of American Railcar Industries (NASDAQ: ARII), is pushing for the merger. Greenbrier, in fact, was a recent new buy for him after he picked up more than 2.7 million shares of the company in the fourth quarter of this year, at around $13.89 per share.
Revisiting the Old Deal
Dating back to the beginning of 2008, Greenbrier and American Railcar had talked about the potential merger, along with a 9.5% stake held by Icahn in the company. At that time, the offer price was much higher in the $30 per share range. However, the merger talks back then dissolved “as a result of certain unresolved issues.” At that time, McAdams Wright Ragen analyst, Michael Roarke, commented:“Greenbrier, in the last 18 to 24 months, has not done anything that suggests that they would want to be acquired." Right after the merger failed, Carl Icahn cut his stake down significantly, and eventually sold his entire stake in Greenbrier.
Greenbrier and American Railcar Synergy
Greenbrier, incorporated in 1981, is considered to be the leading maker of railroad freight car equipment for European and North American markets, divided into several main segments including Manufacturing, Wheel Services, Refurbishment & Parts; and Leasing and Services. The business has customer concentrations, with TTX Company, Union Pacific Railroad and BNSF Railway accounting for 53% of total revenue in fiscal 2012. Based on the current backlog of the company, S&P estimated that Greenbrier had 15%-20% market share in the US railcar market, and 10%-15% market share in European markets.
American Railcar is the business involved in making general-purpose railcars, covered hopper and tank cars to serve mainly for the US market. Like Greenbrier, its top ten customers took around 77% of the firm’s total revenue, whereas the top three customers accounted for more than 50% of its total sales in 2011. American Railcar currently holds around 10% market share.
According to Greenbrier’s board, the merger of the two companies would create a synergy, which is beneficial to both companies’ shareholders. A combination would form a big player with more than 30% of the railcar market in the US, and also bridge the gap with the biggest player in the industry, Trinity Industries (NYSE: TRN). However, Greenbrier’s Board has rejected Icahn’s offer as it thought the offer price “is inadequate, grossly undervalues the Company and is not in the best interests of Greenbrier stockholders.”
Lowest Valuation Among Peers
Currently, Greenbrier is trading around $16 per share, with the total market capitalization of $438 million. American Railcar has a larger market capitalization, of $688 million, equating to $32 per share. Trinity is the biggest, with $2.82 billion in market cap, and the share price is trading at $35.71 per share. Indeed, Greenbrier seems to be quite cheap at the current price, when the market is valuing the company at 8.45x earnings. This valuation is much lower than both American Railcar and Trinity, with 15.57x and 11.95x earnings, respectively.
Foolish Bottom Line
I think it is the right decision for Greenbrier to reject Icahn's offer at the current price. With his move and Greenbrier’s rejection, investors could confidently think that the company is undervalued. Further, its revenue and earnings could see a boost in the next year as the company has planned to ramp up tank car production to 3,000 cars annually, three times higher than what it has delivered in fiscal 2012.
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