Hopping On FreightCar America As It Slows Down

FreightCar America (RAIL) is the leading manufacturer of coal freight cars in the United States. It has a whopping 80% market share.

Recently, the coal market has been in a slump, taking the coal freight car market down with it. The problem RAIL is facing is inventory backlogs, which of course become worth less and less over time due to depreciation expenses. Orders are declining for freight cars which is really hurting the company.

Fortunately, the company is still making money and while the latest quarter operating cash flow was negative, it seems like the worst is here. Any book on coal will tell you that coal demand for the next ten years is bound to increase which would substantially help the share price of RAIL. With much of its market cap in cash, the company will not go bankrupt.

One should also take note that the company has a very high return on assets due to a lack of cap-ex. Every commodity company will face blips along the way (or in this case an industry directly correlated with commodities). The time to buy is when things are looking bad.

This is a best of breed company at a bargain price. This does however drift away from my usual strategy of buying deep value stocks, ones trading below their liquidation values, etc. This is no Bexil or FEC Resources — rather, a really well run company at a bargain price.

Disclosure: Author is long RAIL

RAIL 1-yr chart:

Comments

[sgorelik]

Eric,

Unfortunately i have to disagree with you on the attractiveness of RAIL at current market prices. I have spent some time looking at the company since the valuation multiples were extremely "intriguing."... What i found out is that normalized replacement rate for existing coal car fleet is around 8 to 9K cars per year (250K cars on the tracks today with 40yrs average useful life). I agree with you that coal demand will continue to grow however coal plant expansion plans can be satisfied with around 3 to 4K extra cars per year. Applying 80% market share to these calculations we get approximately 10 to 10.5K units of demand per year from RAIL. This level of demand is well below not only 2006 but also 13K cars that were produced in 2005. Even if we take into account improvements in operating leverage that the company achieved by restructuring it manufacturing operations - the gross margins on normalized basis are should be well below double digit figures achieved in last 2 yrs. With this in mind, I estimate the fair value of the company to be around $38-40 per share. There is a chance that the company could benefit significantly from intermodal products of from foreign JVs but at this point it is far from a safe bet.

I agree with you that is a good company and i would definitely be looking at it if the stock price falls into $30s. If you look at a 2yr chart for the company, we can see that those price levels are not out of the question.

A bit more detailed analysis is included on gorelikresearch.blogsp...

Steve