When I recently covered The Greenbrier Companies (NYSE:GBX) I cited it as a terrible 2015 call that could turn out to be a magnificent 2016 play. Recall that the name caught my attention in July 2015 and I discussed that there is so much negativity in this company's sector that I think the stock actually was attractive as it fell under $50. Of course it fell another 50% to $25 from that level. The outlook for rail and transport, along with the declining price of oil has crushed business. In fact, rail traffic was recently reported down 6% in 2016, although oil has started to claw back a bit. That said, there has been a strange assumption made by the market that Greenbrier needed to be tied to oil prices. That is a mistake in my opinion. It's the demand that keeps driving Greenbrier along, but the stock is still very depressed.
There are a few things happening here. First, Greenbrier has gotten beaten down by a bad market the last few months in addition to being punished with oil prices and oil related stocks. I still think the correlation with oil is somewhat unfair. Why? Well it is linked to oil trading wise because it manufactures all manner of rail cars, in addition to specialized cars for oil transport. But it is unfair because that is not all it does. It also provides wheel services, including reconditioning of wheels and axles, new axle machining and finishing, axle downsizing, and heavy railcar repair as well as routine railcar maintenance. Further padding revenues, GBX offers operating leases and by the mile leases for a fleet of thousands of railcars. But how is the performance? For this we turn into this mornings' earnings report.
Revenues came in down 14% year-over-year to $613 million, but this was a beat on estimates by $13.3 million. I am pleased to see the company has snapped out of its losing ways of missing on revenues. How about earnings? Well net earnings attributable to the company were $35 million, or $1.12 per share. This is down substantially from the $45 million, or $1.41 per share, it brought in back in the prior quarter. However, these results beat estimates by $0.03. Further, adjusted EBITDA for the quarter was $99.5 million down from $108 million last quarter. It represented 16.2% of revenue, up from 16% of revenue last quarter. These results reflect the tough operating environment, but still solid demand for the company's products.
The backlog is a key indicator. Railcar backlog as of May 31 was 31,200 units with an estimated value of $3.6 billion yielding an average unit sale price of $116,000. This compares to 34,100 units with an estimated value of $4 billion (average unit sale price of $116,000) as of the end of Q2. New railcar deliveries totaled 4,300 units for the quarter, down from the 6,900 units in the last quarter and the 4,500 units in the quarter before. The good news is that orders for 1,700 diversified new railcars were received during the quarter. In the past I told you that the company continues to chip away at its marine backlog and as of February it totaled approximately $18 million. However, the company saw orders for two large ocean barges bringing the backlog back to over $120 million.
When I highlighted the name I said this pick is "about the fundamentals." That said, despite the otherwise terrible operating environment, the company is doing surprisingly well. Take a look at gross margin. The company had a goal of reaching at least 20% gross margin by mid fiscal 2016. It surpassed these expectations greatly already. Last quarter however due to the operating climate margins retracted to 18%. This is still strong, but is below the target. Why? Well it dropped due to some issues with product line changeovers and marine production as well as lower margin percentage on the syndication of acquire railcar portfolio. However, here in the present quarter, aggregate gross margin widened to 20.7%.
When I first discussed the company I stated that it pays a nice dividend. At the time the board had declared a quarterly dividend of $0.15. Well recall that the dividend had been raised to a strong $0.20 per share quarterly. Just recently, it was upped another 5% to $0.21 per share. This means the stock yields over 3%. I believe once the company starts coming back and the upswing cyclically begins, future raises continue to be very likely. In Q3, Greenbrier also repurchased $33.4 million in common stock, taking advantage of the depressed prices. The company sees opportunity to buy its stock this low, and so should you.
Let us not forget that this stock has been hammered by the shorts. In fact 32% of the stock float is still sold short. Anytime short interest exceeds 15-20% there is a strong change of a short covering rally. This has not occurred for the name yet, but one must realize it's indeed a real possibility. Of the 27,000,000 shares of the float, over 8.6 million are short. Right now we are in a waiting period. The long-term investor could be scooping up shares even if the road ahead will be bumpy. The company is improving itself for the long haul. Looking ahead, Greenbrier sees new railcar deliveries of 20,000 to 21,000 units, with revenues of $2.8 billion and earnings of $5.70 to $5.90. This was a slight downward revision to guidance and so shares are being hit today. But with a diversified backlog, with non-energy related railcars representing 80% of total backlog, that should allay the oil fears. The company's aftermarket businesses in railcar repair, wheels and parts provide continued revenues to help weather the storm. I want to continue to cherry pick this name under $25 as a long-term play.
Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."
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.