Four Big Reasons to Replace Trinity with Greenbrier Companies

11/17/2014 5:32 pm EST


Jim Jubak

Founder and Editor,

Since he still likes the railcar sector, MoneyShow's Jim Jubak is replacing the shares of the company he sold last Friday, November 14 with another railcar maker for a variety of reasons.

On Friday, November 14, I wrote I would sell Trinity Industries (TRN) out of my Jubak's Picks portfolio. I still like the railcar sector: The order backlog for freight and tank cars hit an all time high after railcar manufacturers took in 42,900 orders last quarter. Thank the energy boom and a bumper grain crop for that.

But Trinity Industries faces an overhang of lawsuits against its unit that makes guardrails for highways. Granted that the highway construction unit accounts for only 10% of sales, I still think the 14 lawsuits pending on charges that Trinity made—and then kept quiet about—changes to its impact—absorbing guardrail head, adds an element to risk to the stock that you don't need. I think the company has failed to get out in front of a problem that goes straight to the heart of what it sells-which is, actually, safety.

Today, I'm replacing Trinity Industries in the Jubak's Picks with another railcar maker, Greenbrier Companies (GBX).

The order book—a record backlog after bookings for 42,900 freight and tank cars in the second quarter—is why you want to own the sector. Companies are seeing a perfect storm of orders as demand to ship oil from US shale fields and to move a bumper crop of grain keeps them scrambling to meet demand. Add in the replacement market as new regulations require safer oil tank cars in Canada and the United States on a yet to be decided schedule. Backlogs are so big that even a sustained period of lower oil prices isn't going to cut into sales in 2015—and probably not into 2016 either—as railcar leasing companies building up their fleets fear to lose their place in line if they cancel orders because of a short-term drop in oil prices. With orders high and demand outstripping supply, margins should remain strong in the sector. (The Pipeline and Hazardous Materials Safety Administration of the Department of Transportation is expected to rule this month on a schedule for implementing stricter railcar standards. The rail industry has argued for as long as seven years. Safety advocates have pushed for two to three years. It's likely that stocks in this sector will be volatile on the decision).

Why pick Greenbrier?

The company is diversified within the sector with four business segments that design and manufacture rail and tank cars; that repair and recondition wheel sets; that provide leasing and financing services; and that provide software-based services to manage railcar fleets.  

In its October 30 earnings report for the company's fiscal fourth quarter, Greenbrier announced earnings that met the Wall Street consensus and revenues that fell 2.3% short. Orders in the fourth quarter came to 15,000 units bringing total orders for fiscal 2014 to 39,000 units worth $3.72 billion.

But the really important numbers were in the company's guidance for what it sees in fiscal 2015. Management said the company expects fiscal 2015 deliveries to exceed 20,000 units, above the Wall Street consensus projection of 19,000 and well above the 16,200 deliveries of fiscal 2014. Revenue will be at least $2.5 billion and adjusted earnings per share will fall in the range of $4.25 to $4.55. That was above the pre-earnings announcement of $4.11. The current consensus projection of $4.40 a share works out to 43% earnings growth for fiscal 2015.

But because of the uncertainties surrounding the timing of stricter regulations and the selloff in everything touching on oil, Greenbrier trades at just 14.6 times projected fiscal 2015 earnings per share. (The shares are down about 19% as of the November 13 close from their 52-week high.)

In the earnings conference call, Greenbrier CEO William Furman argued strongly that the schedule from the Pipeline and Hazardous Materials Safety Administration wouldn't have much effect on Greenbrier's business because demand was so strong over the next two to three years. For the same reason, he wasn't concerned about the effect of lower oil prices over that period.

In my opinion, new manufacturing capacity that's in the works poses more of a threat to the sector than regulatory schedules or oil prices. New factories would start whittling away at the current backlog, but the current backlog is so strong that even new capacity is unlikely to have a significant effect on revenue at companies such as Greenbrier within that two-to-three year window.

My target price for August 2015 is $81 a share.

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