New Rules, Finally, on Tank Cars Send Greenbrier Up 8% on the Day

05/01/2015 5:28 pm EST


Jim Jubak

Founder and Editor,

New safety rules for trains carrying oil were announced today and shares of companies that make tank cars or brakes for railcars all climbed. These regulations that were a long time coming were a key part of MoneyShow's Jim Jubak's logic in buying this particular stock in the first place.

They’ve been a long time coming.

Today, May 1, regulators in the United States and Canada announced new safety rules for trains carrying oil. The rules would require the phase-out of older oil tank cars that are more vulnerable to puncture, fire, and explosion. Tank cars built before October 2011, the DOT-111 class, would be phased out within three years.  Cars in the CPC-1232 class, built after October 2011 but still built without reinforced hulls, would be replaced by 2020. That’s a faster timetable than proposed by Canada earlier this year. New cars would have thicker hulls, head shields to protect the ends of cars, pressure relief valves, and electronic pneumatic brakes.

The rules would result in either replacing or retrofitting an estimated 155,000 tank cars.

As you might expect, the oil industry isn’t exactly overjoyed. The regulations are estimated to cost $2.5 billion, according to projections in the rules. Benefits, again according to the rules, would range from $912 million to $2.9 billion. To me, those benefit numbers seem low. In July 2013, a train carrying crude derailed in Lac Megantic in Canada. The explosion killed 47 people.

Yesterday, independent of the new rules, a group of six senators proposed a fee to be imposed on companies that ship oil, ethanol, or other flammable liquids in older tank cars. The fee would pay for tax breaks of up to 15% of the cost of upgrading an older tank car, for companies that use new or retrofitted tank cars built to the standards in the new rules.

Shares of companies that make tank cars or brakes for railcars—Greenbrier (GBX), Trinity Industries (TRN), Westinghouse Air Brake Technologies (WAB), and American Railcar Industries (ARII)—all climbed after the rules were announced. Greenbrier, a member of my Jubak’s Picks portfolio, closed up 8.04% or $4.64, to $62.33. The shares are down 0.62% as of that time since I added them to this portfolio on November 17, 2014. These regulations were a key part of my logic in buying this stock so they are anticipated in my $84 a share target price.

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