Seeking Alpha
Profile| Send Message|
( followers)  
A declining backlog is haunting FreightCar America (NASDAQ:RAIL). For the third quarter of 2006, sales were $395.8 million and net income attributable to common stockholders was $36.8 million, or $2.88 per diluted share. In comparison, to the third quarter of 2005, the Company had sales of $263.4 million and net income attributable to common stockholders of $17.0 million, or $1.35 per diluted share.

Net income for the third quarter of 2006 was $36.8 million, compared to net income of $17.0 million for the third quarter of 2005. EBITDA was $57.5 million in the third quarter of 2006, compared with EBITDA of $30.2 million in the third quarter of 2005. The improvement in net income and EBITDA reflects increased sales volume, operating leverage attributable to higher
volume, improved productivity, and the impact of pass-through of increases in material costs to our customers with respect to all of our railcar deliveries.

Key Drivers

The company is the leading manufacturer of aluminum-bodied railcars in North America, based on the number of railcars delivered, and the leading North American manufacturer of coal-carrying railcars. Production of coal-carrying railcars represents 93% of the deliveries of railcars in 2005 and 78% of the deliveries of railcars in 2004. The Company estimates that they have manufactured 80% of the coal-carrying railcars delivered over the three years ended December 31, 2005 in the North American market.

Backlog of coal cars is the key to growth for the company. As the table below shows the company is experiencing a substantial reduction in new orders for rail cars. In fact the Company expects to see lower production starting the 2nd quarter of 2007 unless new orders are received.

RAIL backlog

In the three months ended September 30, 2006, the Company delivered 5,027 new railcars, compared to the delivery of 3,617 new railcars in the three months ended September 30, 2005. Orders for new railcars totaled 357 units for the three months ended September 30, 2006, compared to 3,763 units ordered for the three months ended June 30, 2006 and orders of 6,884 units for the three months ended September 30, 2005. Approximately 90% of the Company’s backlog as of September 30, 2006 consisted of coal-carrying railcars.

Shortly after the end of the quarter the Company announced an order of an additional 2,073 cars as well as an exclusive supplier agreement with TXU Generation Development to provide up to 7,650 aluminum coal-carrying railcars to be delivered in the second half of 2008 through 2009. Specific railcar orders from TXU will be entered into their backlog as notice to proceed with production is received.The North American railcar market is highly cyclical and the trends in the railcar industry are closely related to the overall level of economic activity.

During the most recent industry cycle, industry-wide railcar deliveries declined from a peak of 75,704 in 1998 to a low of 17,736 railcars in 2002. During this period, the Company’s railcar production declined from approximately 9,000 railcars in 1998 to 4,067 railcars in 2002. In 2004 and 2005, industry-wide railcar deliveries grew to 46,871 and 68,612, respectively, and the Company’s railcar production increased to 7,484 and 13,031 railcars, respectively.

This cyclicality of the markets adversely affects operating results and cash flow of the industry and RAIL. However, the Company expects railroads and utilities to continue to upgrade their fleets of aging steel-bodied coal-carrying railcars to lighter and more durable aluminum-bodied coal-carrying railcars. For example, two of the Company’s largest customers, BNSF and Union Pacific have delayed new orders for rail cars until they have increased their track capacity from the Powder River Basin coal mining region. The joint development of two additional rail lines will not be complete until early 2008. As a result new orders coal carrying rail cars from these railroads will not take place until late 2007 at best.

There four other principal manufacturers in the North American railcar market, which are Trinity Industries, Inc., National Steel Car Limited, The Greenbrier Companies, Inc. and American Railcar Industries, Inc. Trinity Industries is our only current competitor in the North American aluminum-bodied coal-carrying railcar market. Management

On January 3, 2007 the Company announced today that Christian Ragot will join the Company as Chief Operating Officer on January 29, 2007, and will become President and Chief Executive Officer on April 30, 2007. Mr. Ragot will serve as a member of the Company's Board of Directors beginning on January 29, 2007.

Mr. Ragot, 48, will succeed John E. Carroll, Jr. as President and Chief Executive Officer of the Company. Mr. Ragot joins the Company from Terex Corporation, where he spent seven years serving in various senior executive leadership positions, including President of Terex Utilities and Roadbuilding for the past three years and, previously, President of Terex Utilities, President of American Crane, Senior Vice-President, Sales and Aftermarket Services, and various other senior-level positions at American Crane. Prior to joining Terex Corporation in 1999, Mr. Ragot was Vice President and General Manager of the Air Compressor Group, Europe of Ingersoll-Rand Company, and held various other managerial and senior-level positions during his fifteen years at Ingersoll-Rand Company.

With a new CEO in place it is prudent to monitor the performance of the company.

Other Considerations

The Company is considering entering a new rail car segment with a competitive design that can be delivered at a low cost. Success in the rail car business requires an economy of scale. For the Company to be successful it will have to generate substantial sales of this new car, taking away sales from their competitors. This can be a difficult process and usually requires expenditure of a lot of cash. The success of this endeavor should be watched very carefully before making a buying commitment.

Recent selling by a few hedge funds who must liquidate their portfolios, and a large short interest (17.7% of outstanding shares as of 12/15/06) representing about 13.7 days of average volume has put pressure on the stock. The covering of these shorts will contribute to buying pressure once it takes place, however, this buying will not take place until the economy begins to turn around.


The cyclical nature of RAIL’s business tells us to delay buying until a turn around becomes more clear. For now this turn around does not look like it will begin until late 2007 at the earliest. For now it is best to hold off buying any shares of RAIL until the economy and demand for coal cars becomes clearer.

Disclosure: Author has no position in RAIL.

Source: A Declining Backlog Is Haunting FreightCar America