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I’m still doing some work trying to understand the railcar and coal industries, which is largely motivated by my feeling that FreightCar America (NASDAQ:RAIL) represents a great opportunity. With eighty percent of its North American market share in coal car manufacturing, and a substantial majority of the company’s business tied up in delivering to this market’s participants, it’s clearly an important item of research.

The industry is in a bit of a bubble, some say, that will burst within the next few months, or even years. Nonetheless, I think this may be a good time to by RAIL, since the bearishness on the industry going forward in the short-term has left the stock under-appreciated and poised to break out over the next few years, as coal has become a more long-term viable and growing business.

Here are some things that I like about the company:

  • It has a great market share.
  • It is working to diversify its revenue stream by offering cars catered to the needs of other buyers (not just coal transporters).
  • It is showing great returns on capital, and posting respectable margins.
  • There is growing institutional interest given Buffett’s recent railroad purchase, and the cheapness of the stock.
  • The transparency of a good chunk of the next year to two year’s revenue given the nature of contracts with customers and order backlog records.
  • Here are some of the things I don’t like about the company:

  • It is a cyclical business.
  • It is a product with long life-cycle, that is dependent upon spotty orders, and there is infrequent repeat business for replacements.
  • I have my own feelings of uncertainty regarding the coal industry.
  • RAIL 1-yr chart:
    RAIL 1-yr chart