Behind The Curtain Of American Railcar Industries

| About: American Railcar (ARII)
This article is now exclusive for PRO subscribers.

Summary

Fantastic Dividend Yield Of 4%.

Current backlog represent over 10 months of revenues.

Shares are down more than 1/3 from their 52 week high.

American Railcar Industries (NASDAQ:ARII) is a company which manufactures railcars. They derive approximately 79% of their revenues from selling railcars, 13% from the leasing of railcars, and 8% from the servicing of railcars. Although I was not very familiar with ARII , I had in fact written an article about its competitors Trinity Industries (NYSE:TRN) and then Greenbrier (NYSE:GBX) and was then pointed in the direction of ARII. The previous article on TRN can be found here, and the previous article on GBX can be found here.

Unlike GBX, which has a marine segment and TRN which makes a small amount of revenues from construction (or manufacturing steel related products), ARII is very focused on the railcar industry. The company has a current backlog representing just over 10 months of revenues in the manufacturing and leasing divisions. The services division is excluded from the backlog calculation.

Looking back at the P/E on ARII, we can see investors have had more than one opportunity to buy shares at a low P/E. Value line estimates the 2016 EPS at 5.15 per share, translating to a range of approximately 7 to 9 times projected 2016 earnings.

Share Price

Price / Earnings

EPS

High

Low

High

Low

Year 2016

46.16

36.21

Year 2015

60.40

33.00

9.45

5.16

6.39

Year 2014

82.80

42.20

17.77

9.06

4.66

Year 2013

47.90

29.90

11.27

7.04

4.25

Year 2012

36.30

20.30

11.86

6.63

3.06

Year 2011

28.70

13.70

143.50

68.50

0.20

In addition to the P/E multiples, let's also take a look at the P/BV (Book Value) multiples. The $27 in bold is a conservative estimate.

Share Price

Price / Book Value

BV / Share

High

Low

High

Low

Year 2016

46.16

36.21

1.71

1.34

27.00

Year 2015

60.40

33.00

2.26

1.24

26.67

Year 2014

82.80

42.20

3.62

1.85

22.87

Year 2013

47.90

29.90

2.40

1.50

19.99

Year 2012

36.30

20.30

2.14

1.20

16.97

Year 2011

28.70

13.70

2.02

0.97

14.19

In the case of ARII, the P/BV multiple has a low of about 1.20 (excluding 2011 and a high that averages 2.36, (2.10 if you exclude the high 3.62 number). At a current price of $39.75, the multiple is approximately 1.5 (using the $26.67 BV), and the P/E is 7.71 assuming the $5.15 EPS estimate from Value Line is correct. This definitely doesn't look like a bad entry point, but not the best one either. Both GBX and ARII have higher dividend yields than TRN, but considerably lower dividend payout ratios. In the last 3 years, the payout ratio at ARII has been between 23% and 35%, a relatively low number given the 4% yield. Payout ratios at GBX have averaged 11% in the past 3 years and TRN's about 12%.

From past experience, a higher (sustainable) dividend yield typically leads to a lower beta. Not true in this case. The betas for ARII, GBX, and TRN are 2.68, 2.65, and 2.16 respectively, according to Google finance (NASDAQ:GOOG). Why TRN which has the lowest beta has the lowest beta is something I'm not sure about. Please feel free to comment on this below.

Dupont Model

Looking at the three step Dupont model over a number of years, the profit margin at ARII has increased steadily from 8% to 15% from 2011 to 2015. This is a good thing. The asset turnover increased from 2011 to 2012, only to be followed by a consistent decrease until 2015. A decline in asset turnover is not typically a good thing. Lastly, the financial leverage ratio which was pretty consistent from 2011 to 2014 has increased in 2015. This is typically not a good thing. Below you will find the ROE breakdown for yourself.

PROFIT MARGIN

ASSET TURNOVER

FINANCIAL LEVERAGE

Net Income / Sales

Sales / AVG Total Assets

AVG Total Assets / Average SE

ROE

Year 2015

133

889

1361

889

1361

516

0.1501

0.6533

2.6389

0.2587

Year 2014

100

733

1009

733

1009

465

0.1358

0.7265

2.1715

0.2142

Year 2013

87

751

818

751

818

402

0.1158

0.9179

2.0357

0.2163

Year 2012

64

712

757

712

757

340

0.0897

0.9405

2.2269

0.1878

Year 2011

43

519

679

519

679

309

0.0835

0.7648

2.1977

0.1403

Conclusion

Looking at all things considered, ARII is not in a bad position, nor is it a bad time to buy. As an investor, I look for securities which are undervalued instead of fairly valued. ARII seems completely fairly valued looking either on a stand-alone basis, or on a comparative basis.

As a reminder, my TRN article can be found here.

As a reminder, my GBX article can be read here.

Out of the 3, I prefer TRN.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.