The Greenbrier Companies - On Track To Brighten Your Future

| About: The Greenbrier (GBX)

Summary

GBX is a leading manufacturer of railroad freight cars in North America and Europe that has seen shares more than double in 2014.

The company trades at less than 1x revenue and 17x FY’15 EPS, with 33% earnings growth and could be worth over $100 per share.

Current shortages of railcars in North America for shipping oil and automobiles will provide future earnings growth for the industry.

The proposed legislation to come in North America for safer tank cars will increase overall orders and add to the existing backlog.

Valuation

The Greenbrier Companies (NYSE:GBX) designs, manufactures, and markets railroad freight car equipment in North America and Europe. The company at the time of this report trades at just over $71 a share with a market cap of $1.96 billion. So far, through the first 3 fiscal quarters GBX has reported revenue of $490, $502 and $593 million or total revenue of $1.58 billion. Management said on the third quarter call they are expecting to do about $2.2 billion in sales for this fiscal year and with one quarter left and GBX's current pace they should be able to achieve that. This means that GBX is currently trading at 0.89 times 2014 sales. When compared to peers, Trinity (NYSE:TRN) 1.30x 2014 sales and American Railcar (NASDAQ:ARII) 2.31x's, GBX is trading at a nice discount. This is one reason I am long shares of GBX and believe the stock is undervalued despite the incredible run it has had this past year. If you take GBX and just apply Trinity's 1.30x's sales valuation you can make a case for GBX to trade around $104 today. Then if you look at the average analyst estimated revenue of $2.5 billion in 2015 you can make a case for GBX to trade around $118 in the coming year or two.

GBX currently trades at 17.5x forward EPS, in line with ARII 17.7x EPS, but higher than TRN 11.7x forward EPS. According to Yahoo! Finance, the average analyst estimate for GBX for 2015 is $4.09, up from $3.06 in 2014. This is a growth rate of 34% y-o-y. That makes a forward P/E of 17.5x seem cheap in my opinion. Even at 25x FY'15 EPS estimates, which still seems cheap to me, this stock would be valued at $103 per share. I understand that this business is very cyclical. GBX most likely trades at some kind of discount due to the lumpiness of the business. The stock is currently trading at 23.4x FY'14 estimate, so there is no reason you can't put a 25x EPS for 2015 numbers, with 33.7% growth. Likewise, analyst are expecting TRN's EPS to fall to $3.96 in 2015 from $4.12 in 2014. For ARII, average analyst estimates rise to $4.80 in 2015 from estimates of $4.58 in 2014, a growth rate of only 4.8%. GBX's higher multiple is supported by its higher earnings growth rate.

The balance sheet looks very clean, with low debt to assets. Using Yahoo! Finance, total assets at the end of 3Q'14 were $1.45 billion to total liabilities of $974 million, of which $465 million is in the form of debt. GBX has total current asset of $823 million.

Shortage of Railcars

One of the reason for the increase in revenue and stock price movement is due to the increase of moving oil from the Bakken and other shale formation across the country. According to an article by Zacks in 2013 more than 400,000 carloads of oil have been ship via railroad, up from 9,500 in 2008. Since the US lacks the pipelines to move the oil to the refineries, moving oil via rail has become an important means of transportation. In addition to moving oil, there has been a shortage of railcars for moving automobiles. In the same article written by Zacks, it states automakers ship 70% of their automobiles via railway and there is currently a shortage of up to 1,000 railcars daily.

Safer Cars

Outside of the valuation the story around GBX is compelling. Recently, there have been moves by both the US and Canada to strengthen safety measures needed to transport flammable liquids. This will result in the retirement or fixing of thousands of the class DOT 111 tank cars. According to GBX on their last call, the GBX design is up to eight time safer at any speed when compared to legacy DOT 111 class cars used for flammable products. In 2011, the railroad industry made mandatory an improved standard to the CBT 1232 design. According to GBX, the design has never been ratified or endorsed by the Department of Transportation. GBX claims their tank cars are approximately two times safer than fully-jacketed CBT 1232 design. This tells me that GBX is ahead of the curve for safety practices and should benefit from any new regulations that come out from the department of transportation.

Risks

There are two potential down sides to GBX. The first being new pipelines being built, but if the Keystone pipeline is an example then we have nothing to worry about for quite a while. Obviously if more pipelines are built it could take away a lot of the oil that is currently being shipped via rails, thus cause a glut of railcars. The second hurdle would be if the refineries start getting built closer to the shale formation. However, this process would be many years out and would not have any impact on the immediate future.

Final thoughts

GBX has more than doubled since the beginning of this year and for good reasons. They are an exciting company that plays a key part in the growth of the energy boom that is happening in this country. The stock trades at a very attractive valuation in both Price to Sales and Price to Earnings multiples and has a clean balance sheet. You could make a very strong case that GBX should be worth $104 today based on its peers' valuation and over $120 in the next year or two. Are you ready to take a ride on GBX.

Disclosure: The author is long GBX.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mott Capital Management is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.