American Railcar (NASDAQ:ARII) is shooting higher today on the back of a better than expected earnings report. The shares had dipped significantly after the rail car derailment tragedy outside Quebec over the summer. As I noted on TheStreet.com, this was a huge buying opportunity as it was hard for me to fathom how a company could be held liable for railcars that were decades old, complied with standards and were operated by a railroad.
In addition, I postulated that additional upgraded standards would actually help the company as railroads would have to retrofit or upgrade their fleets; both of which would be good for tankcar demand. That turned out to be a great call as the shares have shot up over $10 a share to just over $43 a share. However, I believe these cheap shares still have significant upside.
Positives from Earnings Report:
- Revenues came in at just under $200mm for the quarter, more than $20mm over consensus estimates.
- Earnings came in at $35.6mm up 17% Y/Y.
- Company had a backlog of approximately 6,300 railcars at the end of the quarter.
- The company also stated that in October (after quarter closed), we accepted a multi-year order from Chevron Phillips Chemical Company LP for 2,750 plastic pellet covered hopper railcars for delivery from 2014 through 2016.
American Railcar Industries manufacturers hopper, tank and other types of railcars in North America.
4 reasons ARII can go higher from $43 a share:
- The amount of oil being carried via railcar continues to grow exponentially due to the North American energy boom. In addition, railroad traffic just posted best month since late 2012. Both are good for demand. The former is primarily responsible for solid earnings and upward guidance at competitors Trinity Industries (NYSE:TRN) and The Greenbrier Companies (NYSE:GBX) this week as well.
- This is the fourth large earnings beat in the last five quarters. In addition, consensus earnings estimates for FY2014 had gone up 5% in the last three month. Look for some upward revisions based on this earnings report and that of American Railcar's competitors.
- Revenues are tracking towards a 15% gain for this fiscal year and the stock has a five year projected PEG of less than 1 (.70).
- ARII has a solid balance sheet and sells for just over 10x forward earnings, a substantial discount to its five year average (37.4).
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.