Good News For Oil Tankcar Manufacturers Continues

Includes: ARII, GBX
by: Bret Jensen

Good news continues to pile up for tankcar manufacturers. The huge (700K barrels/day) Keystone pipeline continues to be mired up in the approval process due to political considerations. In addition, the $2B pipeline Kinder Morgan Energy Partners was proposing to bring oil from the Permian Basin in Texas to the refiners in California recently was cancelled. This 277,000 barrel/day pipeline could not get the long term contracts in place with refiners needed to build this fuel conduit. Even though crude from pipelines are cheaper than from rail, refiners do not see enough pricing advantage to forgo the flexibility on fuel sources available from transporting crude stocks via rail.

This, and an energy expansion that is happening at a quicker pace than the infrastructure to support it, bode well for the continued increases in fuel volume transporting by rail. Over 200,000 rail carloads of oil was transported in 2012, more than triple the volume in 2011. These developments should continue to drive increased demand for tankcars. Two railcar manufacturers that should benefit from this long term demand are profiled below.

The Greenbrier Companies (NYSE:GBX) is a diversified manufacturer that builds many sorts of railcars including tank cars. The company has a large backlog of $1.3 billion, which is sequentially accelerating, consisting of orders for just under 12,000 railcars of all types. This company has just under a $650 million market capitalization (just over $1 billion including debt). The company has more than tripled operating cash flow (OCF) since the end of fiscal 2010 and the stock is cheap, trading at just over 4x OCF. Consensus earnings estimates for both fiscal 2013 and fiscal 2014 have moved up nicely over the two months and GBX is selling at less than 9.5x forward earnings. Longbow, Sterne Agee and Keybanc upgraded their ratings on the stock in April. Stifel upgraded the shares in March.

American Railcar (NASDAQ:ARII) shares have dropped some 20% over the last two months as the company missed earnings estimates. The company had easily beat earnings estimates each of the prior four quarters. Sales were also up 7% Y/Y in the first quarter and the company is adjusting its sales mix mix to focus more on tank railcars where are showing solid demand. The stock is cheap at just more than 8x projected 2014's earnings. Over the last five years, the shares have traded at average forward P/E of over 35. The seven analysts that cover the shares have a median price target of $43 a share on ARII, ~$10 a share above the stock's current price. Revenues are expected to increase more than 10% in FY2014 and the stock sports a five year projected PEG of under 1 (.99). The company reported slightly negative operating cash flow in FY2010, positive cash flow of ~$28mm in FY2011 and over $120mm in FY2012. Operating cash flow continues to increase over the last twelve months and the shares sell for just little over 5x trailing cash flow. Finally, the shares provide a solid 3% yield.

Disclosure: I am long ARII. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.