The Greenbrier Companies (NYSE:GBX) posted its third-quarter results last week. Results were very strong, but even more impressive was the very strong order intake adding to the already solid backlog.
After the huge momentum in recent times, it is important to remind yourself about the long-term cyclicality of the business. Yet, the real question is just by how much the oil and gas revolution has altered the cyclical nature into more structural strength.
After the momentum, I will not jump the bandwagon but re-evaluate the prospects going forwards when new data gives a better clue about the sustainability of the boom, or when a correction makes shares a bit appealing on current valuations.
Greenbrier posted third-quarter revenues of $593.3 million, which was up 18.1% compared to the year before.
Solid revenue growth, but notably great margin expansion resulted in an earnings explosion, with net earnings more than doubling to $33.6 million. Modest dilution took place, still earnings per share more than doubled from $0.51 per share to $1.03 per share.
Looking Into The Quarter
The 18.1% increase in sales was of course the result of increased deliveries for railcars amidst the US oil & gas revolution.
Strong demand resulted in greater opportunities to raise prices, while efficiencies and a favorable mix added to gross margins as well. Gross margins improved by 480 basis points to 16.3% of sales. Total deliveries increased by 900 railcars over the past quarter to 4,300 deliveries. This was the main driver behind a 22.4% increase in manufacturing sales to $425.6 million.
The wheels, repairs and parts business posted a modest 3.1% jump in sales to $140.7 million. Leasing and service revenues jumped by 50.8% to $27 million, which is hugely important given the very high margins of the unit.
Despite a 23.8% jump in selling, general & administrative expenses, profitability was on the rise, thanks to revenue growth and strong margin expansion.
Note that net earnings of $33.6 million were aided by a lower effective tax rate of 26.3%, which was down roughly six percent points compared to last year. Earnings were aided by a $5.6 million gain on the sale of equipment, while those proceeds totaled $5.4 million last year.
For the current fourth quarter, Greenbrier sees deliveries between 4,300 and 4,600 units. This should result in a 4%-6% jump in revenues on a sequential basis, resulting in sales anticipated to come in around $623 million.
Earnings per share excluding restructuring charges are seen between $0.95 and $1.05 per share.
Valuation Of Greenbrier
The company operates with $198.5 million in cash and equivalents. Total debt stood at $465.2 million, which results in a net debt position of close to $270 million. Strong earnings allow the company to reduce its net leverage rather quickly.
So far this year, Greenbrier posted revenues of $1.59 billion, which is up by 24.7% compared to last year. The company turned a $31.8 million loss last year into a profit of $64.6 million. On a trailing basis, Greenbrier has now posted sales of $2.07 billion and earnings of $85 million.
After the huge 14% jump over the past week on the back of the strong results, Greenbrier is now valued at $1.85 billion. This values equity at the business at 0.9 times sales and 21-22 times earnings. If Greenbrier can maintain its pace of posting quarterly earnings of $33 million going forward, the valuation comes down to 14 times earnings.
The company announced a $0.15 per share quarterly dividend, which provides investors with a 0.9% dividend yield.
While sales are anticipated to increase into the fourth quarter, more good news might be ahead. Not only did deliveries jump from 3,400 units in the second quarter to 4,300 units in the third quarter, a further increase in deliveries might be anticipated.
During the quarter, the company received 15,600 new railcars, which are valued at $1.65 billion. Even after the end of the quarter, orders for another 2,700 units were received. As such, the company received orders worth a full year in production in about a quarter's time!
The total backlog now contains 26,400 units with a total value of $2.75 billion, resulting in an average unit sale price of $104,000.
In A Long-Term Cyclical Business
Greenbrier has long operated in a highly cyclical industry, reporting revenues of $729 million back in 2004, to see them temporarily peak at $1.29 billion in 2008. Following the recession, sales fell back to $764 million in 2010, before the economic recovery and increased demand for railcars amidst the oil and gas revolution pushed sales to an anticipated $2.2 billion this year.
Of course, this recent jump has been very beneficial to the bottom line, as witnessed over the past quarter, but it should be noted that the total diluted share base has more than doubled over the past decade. To counter some of the dilution, Greenbrier has repurchased 352,000 shares over the past quarter at a cost of $16.0 million, or around $45 per share. This implies that the company is repurchasing its shares at a rate of 4% per annum.
While all this growth is great, savvy investors have already anticipated a great deal of these improvements. Shares have already more than doubled so far in 2014 and more than tripled over the past year!
While the earnings multiple of 14 times based on an extrapolation of third-quarter earnings is not very steep, remember than Greenbrier operates as a highly cyclical company, as is reflected in the current share price and the strong momentum.
Yet, the real question is how much of this current operational momentum is driven by structural changes as a result of the oil and gas revolution, on top of the cyclical nature of the business. In that light, the very strong order intake is very noticeable and significant. While the book-to-bill ratio will probably exceed the 1 ratio by a comfortable margin in the coming quarters, the question is how quickly the company can turn these orders into real sales.
In my eyes, the momentum has gone too fast, too far, leaving shares vulnerable for a potential setback. I will keep the company on my radar, and will re-evaluate my stance over time.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.