This Company Is on the Right Track

Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

American Railcar Industries (NASDAQ: ARII) peaked at $47 per share back in April. Since then, the stock has declined nearly 30% to its current price. A 30% drop is enough to make even an adrenaline addict's stomach sick. This red flag may be enough to keep the average investor away. But, if you look closely, you may find this railroad stock to be right on track.

Why the 30% drop?

Things were looking good for American Railcar. The stock doubled between May 2012-April 2013. The company's income was increasing big-time, largely due to increased U.S. oil production. But in April, the company reported an earnings miss. Shares tumbled 11% that day, and have continued falling since.

The earnings report -- though missing estimates -- was still a good one. Revenue increased 7%, while net income increased 49%. This reflects the bigger trend over the past couple years.

ARII Revenue TTM data by YCharts

Investors are becoming more cautious now that oil-by-rail -- the industry's biggest growth driver -- slowed 5% from May-June. This concern may be a little out of perspective since oil-by-rail shipments this June were still up 28% from last year.

How's business?

As the United States shale oil revolution booms, so does business for American Rail. This company manufactures the cars needed to transport mostly oil, but also construction supplies and food. Obviously, oil production is surging, which is creating demand for these rail-cars and outpacing production.

As demand has picked up, margins have improved.

ARII Gross Profit Margin TTM data by YCharts

This has allowed American Railcar to start paying out a dividend after a two year hiatus. The dividend has been paid out the last three quarters and currently sits at 3%.

Industry-wide trend

There has been a general bullish sentiment in the railroad sector over the past year.

ARII data by YCharts

A December 2012 report by the Association of American Railroads demonstrated the growth of oil-by-rail. In 2008, only 9,500 carloads of crude -- around 800/month -- were shipped by rail. Last month alone, 13,664 carloads were shipped.

This increase is good for all the players in the railroad industry. In addition to American Railcar, FreightCar America (NASDAQ: RAIL), Union Pacific (NYSE: UNP), and The Greenbrier Companies (NYSE: GBX) have all witnessed a bump in revenue, though some have maximized this better than others.

The good news for American Rail

The drop in American Railcar's stock price is good news for value investors. This company is now really cheap.

Company P/E Ratio Forward P/E PEG Ratio +/- 52 Week High
American Railcar 10.26 8.15 0.63 (29)%
Union Pacific 18.12 14.15 1.11 (4)%
Greenbrier 14.64 9.63 1.15 (4)%
FreightCar 30.18 23.60 -35.58 (32)%

FreightCar America, like American Railcar, is down around 30%. But unlike American Railcar, it doesn't look cheap when compared to other companies in the railroad sector. Earnings per share are actually negative at $(0.18), and earnings have missed estimates in three of the last four quarters.

Union Pacific is one of the leaders in the railroad sector. With over 32,000 miles of rail, this company is a behemoth that is still growing and becoming more efficient. In 2012, the company grew revenue 7%, but net income grew 20%. Shareholders are also being rewarded nicely as the company grew earnings per share 13% in the most recent quarter.

Greenbrier is having a great year, up over 80% from 52-week lows. This freight-car manufacturer has all the business it can handle right now. The order backlog increased 20% in the most recent quarter from the previous quarter. A solid balance sheet -- zero debt and a cash position of $64.5 million -- makes this another solid play.

FreightCar America is down, but has some uncertainty. Union Pacific and Greenbrier are more certain, but trading near 52-week highs. When compared with its peers, American Railcar's drop in stock price, coupled with its low forward P/E ratio, make it an exciting opportunity.

Interesting possibility

One aspect of this company that is hard to quantify is well-known investor Carl Icahn's position in the company. He holds the controlling interest, and on more than one occasion, has attempted to buy-out competitor Greenbrier. All buy-out offers have been rejected by Greenbrier, though it has since offered to buy-out American Railcar instead. Interestingly enough, Icahn is also a major shareholder in Greenbrier.

A buy-out or merger would be good for both companies, as it would combine their energies and likely lead to better margins. At this time, this possibility is mostly speculation. But one thing I know for sure is that Icahn will continue his attempt to make this happen.

Conclusion

Thanks to Mr. Market, you can get into American Railcar at a substantial discount to where it sat just a couple months ago. There is some uncertainty in the sector, and some growth aspects are slowing. But given the current valuation and opportunities, I believe American Railcar is poised for a rebound in the near future.

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Jon Quast 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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