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Tank & rail car manufacturer American Railcar (NASDAQ:ARII) is a small cap (~$1.2B market capitalization) stock I have covered extensively both on TheStreet.com as well as here on SeekingAlpha (I,II, III). I have owned the shares since the low $30's. The stock posted another double digit gain on Thursday and is approaching $60 a share.

Despite this, I am holding my shares as the company is benefiting from some substantial secular tailwinds and delivering stellar results. In addition, the shares are still relatively cheap given the company's growth prospects.

Earnings Results:

The company delivered great quarterly results this week:

  • American Railcar posted earnings of $1.32 a share, easily beating the consensus calling for $1 a share.
  • The company also slightly beat the consensus on revenues and margins increased to 23.8% Y/Y from 20.8% previously.
  • Management announced a whopping 60% increased to its quarterly dividend payout.
  • During the year, the company delivered almost 7,000 railcars. Its current backlog stands at over 8,500 cars.

Tailwinds:

American Railcar is benefiting significantly from several secular tailwinds:

  • The huge domestic energy boom has resulted in a substantial increase in the amount of oil transported via rail. This volume is up 400% since 2005. The boom and its associated rail traffic is likely to continue for several years.
  • Although pipelines are 10x safer per mile than rail for transporting oil, some expansion of pipelines have been caught up in political debates (Ex, Keystone). In addition, many end users prefer paying the higher cost of rail transport rather than signing long term contracts with pipelines as they treasure flexibility.
  • Several oil derailments and a massive explosion that kill some 50 people in a town outside Quebec this summer have led to predictable calls for additional safety standards for tankcars. This will buoy new orders for original equipment and/or retrofitting the existing fleet. BNSR (formerly Burlington Northern) stated yesterday it will order 5,000 new tankcars with higher safety features. Look for other railroads to follow suit.

Valuation:

With the new dividend payout, the stock is providing a yield north of three percent (3.2%). The company has a strong balance sheet with little net debt. Analysts expect revenues to increase in the mid-teens in FY2014. American Railcar is putting more of its production into its leasing arm. This will result in less initial sales but will mean additional recurring and steady revenue in the years ahead.

The stock is selling at 14x forward earnings, a slight discount to the market multiple. Consensus earnings estimates were rising prior to the quarterly results this week. I would look for them to rise further in the weeks ahead.

While not the rock bottom value as it was when I initially bought the shares when they traded for a single digit PE; ARII still looks like an attractive long term growth play. The company should continue to benefit from secular tailwinds, provides a nice yield and has good growth prospects. Besides selling the shares would violate one of the cardinal sins of growth investors "Ride your Winners".

Source: American Railcar Is Killing It