Greenbrier: Riding the Rails

07/12/2016 8:00 am EST


Bret Jensen

Editor, Biotech Gems

Investors do not usually find too many solid yield plays in the manufacturing sector, but this recommend railcar maker is an exception to the rule, explains Bret Jensen, editor of Small Cap Gems.

Greenbrier Companies (GBX) — with a market capitalization of just under $800 million — has become an accidental high-yielder thanks to its stock being cut in half over the past six months or so. The shares now yield approximately three percent.

The sell-off in the shares is a buying opportunity and the stock has behaved better recently, rallying some 15% over the past couple of weeks.

The company last reported earnings in early January and handily beat both the top and bottom line consensus. Earnings came in at $2.15 a share, more than 50 cents a share above expectations. Revenues were up over 60% year-over-year.

The driver behind Greenbrier’s decline and for all other railcar makers for that matter is that demand for oil tank cars has dried up completely thanks to the implosion in crude prices.

Investors are missing the bigger picture on Greenbrier. The company has over six quarters of order backlog right now. Some 80% of that backlog comes from industries outside of energy such as railcars for carrying autos and chemicals.

In addition, new regulations mean approximately 90,000 oil tank cars will need to be retrofitted or replaced by the end of 2019, so orders will eventually pick up even if crude production does not.

The company used the last downturn in the railcar industry to capture market share from its competitors, going from 13% to 32% in market share. I have confidence it will weather the current slump in the energy sector just fine as rivals have fiercer struggles.

The company has guided to $5.65 to $6.15 a share for earnings in 2016 and the consensus has Greenbrier earning $6.00 a share in fiscal year 2016. This is pretty much in line with fiscal year 2015.

The manufacturer bumped up its dividend payout by a third late in 2015. Given its extremely low payout ratio, I would expect Greenbrier to deliver another large dividend hike sometime in 2016.

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By Bret Jensen, Editor of Small Cap Gems

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