FreightCar America, Inc. (NASDAQ:RAIL) currently trades at $15.34. We believe it is a buy and have our 6-12 month target, with or without a takeover, at $20.79 representing a 35% upside.
Quick Math Gives Us a Quick Look at a Value Play Overlooked
|Price: $15.34|| |
MKT CAP: $190M
|TTM REV.: $591.5M|
TTM EBITDA: $45M*
|EV/EBITDA: 3.11||P/E: 8.01|
|P/B: .74||P/S: .32||52W Range: 10.87-21.99|
$85-90M in Cash by December 31, 2016 (according to most 11/1/16 Conference Call)
$24M in leased railcars
$48M in net Property Plant and Equip after depreciation
$100M Inventory (after converting into $100M cash)
$67M in Liabilities
Total of the Assets listed above less the liabilities (others on the balance sheet negate each other) equals: $220M
Current Market Cap: $189 Million (12.38M s/o x $15.34)
TTM EBITDA: $45 Million* (including one-time gains on sale/settlements and restructuring costs)
Ten Year Average EBITDA: $39 Million
So basically the market discount of the net assets above is $31 Million. And, shareholders still own a business that generates an average of $39M in EBITDA over the last ten years for this railcar manufacturer.
AND any takeover is easily financed for any would be buyer. How? Typically one can get 4 x avg. of EBITDA. Therefore, we believe one could get approximately $160 Million in debt financing plus a working capital line. If you add that, plus the cash and cash equivalents on hand (~$40MM), a would be buyer would need little to no cash of their own to takeover this valuable manufacturing company.
So why are they paying us? Why the discount?
The Current Disconnect and Why it is Oversold
Railcar manufacturers at large have been depressed this past year due to the a drastic reduction in new orders and a decline in their current backlog. Sales are down across the board. The industry has been hurt by reductions in orders specifically for coal cars (most dramatic for the last few years as the current administration has been anti coal), oil tank cars, and grain. RAIL currently has no coal cars in their backlog. Additionally, competitor Trinity (NYSE:TRN) has been dealing with a lawsuit regarding their Guardrail (railing installed on roads/highways etc.) and face an awarded (June 2015) judgment of $663 Million, which despite being under appeal, has put a lid on the stock. Greenbrier (NYSE:GBX) has rallied off its lows, it still trades at a discount suffering the same negative sentiment as RAIL. American Rail Car (NASDAQ:ARII), which is controlled by Icahn Enterprises (NYSE:IEP) has a high concentration on tank cars.
When looking at the financials, some do not understand the cycles of the business, and question why the positive EBITDA number have not translated into free cash flow. Specifically overlooked, has been the Company's pay down of $31.6 Million of pension plan obligations for the 9 months in 2016.
"On March 25, 2016, we made a one-time payment of $31.7 million to settle our postretirement benefit obligation for our hourly retirees resulting in a pre-tax gain of $14.3 million (net of plaintiffs' attorneys' fees of $1.3 million) and a reduction in our postretirement benefit obligation of approximately $68.8 million. See Note 14 to the condensed consolidated financial statements." - Source
As the Company turns inventory into cash, these questions will be answered.
Icahn Enterprises recently announced the sale of American Railcar Leasing LLC for an EV of about $2.78 Billion- which is not to be confused with ARII (also controlled by Icahn ). However, this sale could load up IEP's coffers and we know Mr. Icahn likes the rail industry.
Opportunities going forward
Whether you voted for Trump or not, the fact is that his administration will be good for RAIL. In addition to the anticipated infrastructure spend which will benefit rail and truckers who will deliver all that is needed, he has already reached out to the coal industry that was pretty much left for dead under the Obama administration. Coal accounts for the largest amount of railcars and rail transport in the U.S. While there are currently coal cars in storage, a dramatic shift may be in the making as Trump looks to make America energy independent and in fact energy exporters. Oil cars should also get a boast.
Tuck in Acquisition Target or a Platform Target - Either Way, we WIN
Post election, there is less uncertainty. As the economy picks up momentum, rail manufacturers, truck and trailer manufacturers including PACCAR (NASDAQ:PCAR), Wabash (NYSE:WNC), OshKosh (NYSE:OSK), Navistar International (NYSE:NAV), manufacturers of heavy equipment, and earth moving equipment, and heavy parts manufacturers including Deere (NYSE:DE), Caterpillar (NYSE:CAT) and Westinghouse Air Brake Technologies (NYSE:WAB) will all benefit. All of the aforementioned companies could be acquirers of RAIL. Additionally, private equity firms like KKR (NYSE:KKR), Fortress Transportation and Infrastructure (NYSE:FTAI) and Blackstone (NYSE:BX). See below the helpful steps the Company has taken that will provide upside to shareholders and would be suitors.
About the Company
FreightCar America, Inc. manufactures a variety of railroad freight cars, railcar parts and supplies, and leases freight cars under its subsidiary JAIX Leasing Company. The Company and its predecessor, have been making railcars since 1901. FreightCar is headquartered in Chicago, Illinois. FreightCar has facilities in the following locations: Cherokee, Alabama, Danville, Illinois, Grand Island, Nebraska, Johnstown, Pennsylvania, Roanoke, Virginia and Shanghai, China.
FreightCar sold its repair and maintenance services business on September 30,2015. As of October 1, 2015, FreightCar reports Manufacturing, for new railcar manufacturing, used railcar sales, leasing and rebuilds. Parts, considered insignificant is reported under corporate and other.
Railcars available for lease were valued at $24,193,000 after consideration of depreciation of $3,761,000. Lease utilization rate for the fleet was 73% for periods ended September 30, 2016 AND December 31, 2015. Yes, exactly the same. Seems like there is much room for improvement here. In fact, we see this as a great business to sell or spin-off to others who run railcar-leasing better than FreightCar does. FreightCar clearly runs this division as a secondary business. Value - minimum of the $24.19M listed as the net value. One sign of possible encouragement for the leasing business was the announcement during the 11/1/16 conference call wherein the Company stated that $100 million worth of railcar sales would be put in the leasing pool in 2017.
Inventories were $144,658,000 for Sept. 30, 2016 vs $115,354,000 for Dec. 31, 2015. The latest conference call (11/1/16), we learned that this inventory number should be reduced to about $100M by year end. While it is nice that the difference will be turned to cash, we would prefer the industry and therefore the Company get new orders and have to use their cash to build new orders.
Cash and Cash Equivalents
In the most recent conference call, CEO, Joe McNeely, stated that the Company anticipates having over $85M-90M in cash or cash equivalents by year-end, compared to the $40 Million as of last Q.
Incentives for the New Facility
During 2015, the Company received cash payments of $15.733 Million for incentives relating to the Company's capital investment and employment levels at its Cherokee, Alabama ("Shoals") facility. This location should bring more efficiencies to RAIL's cost of production.
Cost Savings Program
The Company announced on August 1, 2016, a cost reduction program whereby 15% of the Company's salaried administrative workforce would be eliminated, the shut down of its Johnstown administration facility as well as a reduction in discretionary spending. The expectation if that the Company will save approximately $5 million per annum.
The Company curtailed much of the operations of the Danville, Illinois facility for most of 2016. The Company owns the Danville facility; and the costs to keep Danville idle are relatively low (according to the Company). However, lack of production directly translates into a lower return on assets.
Strategic Buyers Can Increase the Utilization of FreightCar's Facilities and Skilled Workforce
Perhaps an acquirer may have use of the Danville facility? Perhaps Danville's flexible labor force could be put to good use? While certainly any of the rail companies mentioned above could acquire the Company, other acquirers would make sense. Previously (12/13/16), KORR wrote an article on Wabash National (see article here on Seeking Alpha). Wabash already manufactures select rail equipment and is growing.
12.38 million shares outstanding
$39 Million average EBITDA for 10 years, with TTM being $45 Million
Using a $39M EBITDA and a 6.6 EBITDA Multiple, which is lower than the industry has historically traded at and not allowing any premium for their cash, we see FreightCar America's shares worth $20.79 per share. If we include RAIL's net cash of $40M, the price target is over $24 per share. Our time frame to realize this 35% appreciation is 6-12 months.
Disclosure: I am/we are long RAIL.
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.
Additional disclosure: We made add to our position or sell our position in RAIL at any time without updating this blog. Readers are encouraged to consult an investment professional prior to making any investment.