Recently, I discussed the company Freight Car America, Inc. (RAIL) with Clay Mahaffey, the chief analyst of the National Eagles and Angels Association on the "Stock Watch" segment of my nationally syndicated radio program "The George Jarkesy Show." Freight Car America is a manufacturer of rail cars and they specialize in cars made of aluminum. Below is the transcript of our discussion regarding Freight Car America and its prospects over the next few years. The stock is currently trading around 22.00 and it seems like the industry has some bright days ahead! We also discuss briefly the U.S. coal industry, exports, demand and pricing over the next several years.
George Jarkesy: That's right, turn up the volume, get ready to take notes, listen very carefully; pull off the road if you're driving because now is when to make money on the George Jarkesy show. We have Clay Mahaffey, the Chief Analyst for the National Eagles and Angels. Clay, Welcome to the show today.
Clay Mahaffey: How are you doing George?
George Jarkesy: Fantastic. What interesting company do you have for our listeners today to make money with?
Clay Mahaffey: George, this is very interesting company. It's Freight Car America, Inc. It trades on the NASDAQ under the symbol RAIL, and I like this stock because it has strong growth, and a low valuation. As you can imagine, they are manufacturer of rail cars, and they specialize in coal cars made of aluminum. They have around 70 percent of the market for this product. They reported sales in 2011 of almost $500 million. It was up 83 percent versus the prior year. They made $0.41 per share versus a loss from the prior year, but I like the stock because there are three drivers for revenue.
One, there's a great deal of pent up demand from the long recession to buy rail cars.
Two, the age of the rail car fleet is at record highs.
Three, there's a trend to convert from steel to aluminum to save weight on the rail cars. Prior to the great recession the rail car industry was selling about 60,000 units per year, however it decreased in 2010 to only 18,000, yet in 2011 the market doubled. And the fleets average age is 19 years, but it's very interesting in the Eastern sector of the country they're much older at 29 years.
There is also an economic driver to convert from steel to aluminum. The cars are regulated by the gross weight, so if you are able to significantly reduce the weight on the car, you can load more product, and generate more revenue per car which is a powerful driver. In that regard, I looked at the eastern market in detail. In this region there are 72,000 steel cars greater than 31 years old, and this represents $5 billion of new sales for freight cars over the next few years.
I believe they can easily grow at 20 percent per year, and the current price-to-earnings multiple is less than ten times, that is a low valuation given these gross prospects, so this is very interesting company I think.
George Jarkesy: And what is the revenue growth of the company right now. The company's growing pretty well?
Clay Mahaffey: Well sales in 2011 were $487 million dollars up 83 percent off of a low year in 2010 from the great recession.
George Jarkesy: That's strong growth with a PE ratio going forward below ten. For our listeners, this Thursday on throw-down Thursday, we're actually going to be talking about coal, and one thing Clay, that this makes me think of at this point as you're talking is that it's my belief, in all the research that we've done that with the international demand you're actually going to see coal inventory squeezed.
Coal prices will be inching up higher between now and 2014, starting around 2014 I think we're going to see a substantial move higher in coal given the current power production demand and what new power production is coming online. The increased coal demand for the new power plants is coming mostly from China and India. So this play RAIL could catch that wave also.
Clay Mahaffey: It fits right into it. They need to build these unit trains to get coal from West Virginia to the Seaport on the East Coast and the Gulf Coast, and of course they're working on building ports on the West Coast. But it's an immediate opportunity.
George Jarkesy: Immediate opportunity, sorry I interrupted you. What was the immediate opportunity?
Clay Mahaffey: For exporting coal from the East Coast of the United States to Europe and South America, other countries.
George Jarkesy: And when RAIL has had extra cash in the past, have they been a dividend payer? I know they had some losses you said prior years during the great recession.
Clay Mahaffey: The company paid a small dividend. It's not that much. It's a fairly lumpy business. There are really strong years, and then it cuts back because these rail cars last awhile, but they have developed an ongoing service business to maintain the fleet that they sell. The service they provide is only about 10 percent of their revenue. It's primarily a manufacturing company.
The Industry is coming into a good 2 to 3 year run here when they're making up for lost ground from the great recession. When you include the increasing exports, plus the turnover from the older steel cars to the newer lighter aluminum cars that they can put much more coal in because the weight of the rail car itself is so much less.
George Jarkesy: You mentioned the word exports. You mean coal exports; they are not actually selling these railcars overseas are they?
Clay Mahaffey: No, no. It's a U.S. company. They have two plants; they just opened a second plant in Virginia or West Virginia I believe. They have a complete product line. They have 20 or 30 different models plus they have a service division that provides maintenance, and does some fleet tracking and logistics planning and things of that type.
George Jarkesy: Okay, well at less than a 10 PE going forward it sounds pretty inexpensive here given the high growth rate last year and for the .
Clay Mahaffey: It's good. Well the stock is up. It's up to about $22.00, but I think it will outperform over the next year or two.
George Jarkesy: The symbol is RAIL. Well, thank you very much, and we look forward to hearing from you next time on "Stock Watch!"
Clay Mahaffey: Okay. Thanks George.