Justin Sink

FreightCar America Is Sooo Twentieth Century

I think that it is important to look forward to the next cycle instead of backward. The reason is that 2002-2006 was not typical. First 2002 was the lowest bottom ever for the rail car industry. Using this year is like using black Monday to study typical stock market variations. Second there were a lot of extraordinary costs in 2004 and 2005. These include a large settlement with the unions, and the IPO for the stock. These costs should be added back to earnings to find the real operating earnings power. Third the nature of the company has changed with the addition of low cost non-union plants that as of last quarter churned out 80% of the cars for RAIL, some of these addtional margins will be retained. Fourth the coal industry has huge amounts of potential growth ahead of it with much of the coal coming from the West and being hauled much further. RAIL is the undisputed low cost leader in making cars for this coal with 84% market share. This along with an aging coal car fleet that must be replaced and a booming capacity constrained railroad industry with lots of free cash points to a much less severe trough in the next couple of cycles. Fifth, RAIL is moving into other car types, intermodal and covered hoppers, and up to 4 more international joint ventures which must be added to the valuation as a future growth opportunity. Sixth, it looks like RAIL’s pension will be fully funded after this year with will add to future earnings going forward. Last and most important is that RAIL is hanging on to a huge wad of cash, 30% of their market value, that should be removed from their market cap as a non-operating asset giving RAIL a current equity market value of about $40 per share.

P.S. With 112.5% institutional ownership going short RAIL seems more than a bit crazy.