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: