Greenbrier Companies And Its Real Value

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About: The Greenbrier Companies, Inc. (GBX)
by: Grant Gigliotti
Summary

Greenbrier has been suffering recently due to loss accruals on certain railcar contracts and facility closure costs in the railcar repair operations.

Manufacturing efficiency has decreased because of production line changeovers.

Investors are hoping that the American Railcar acquisition will be the company's saving grace.

The company's weakening fundamentals and declining returns put a damper on the potential benefits of the acquisition.

Factual evidence tells about the real value vs. stock price.

To be blunt, Greenbrier Companies Inc. (GBX) has been suffering recently due to loss accruals on certain railcar contracts and facility closure costs in the railcar repair operations. Also, the manufacturing efficiency has decreased because of production line changeovers.

With all of the negative news surrounding GBX, shareholders have been uplifted by the positive news of Greenbrier's announcement to acquire American Railcar Industries.

This acquisition is supposed to increase earnings and cash flow within the first 12 months of acquisition. It will lower the company's transportation costs, increase company diversity, and improve manufacturing efficiencies and cost savings from vertical integration.

My thesis before doing a full analysis is that this bruised up company could see improvements from the acquisition of American Railcar, but investors shouldn't count their money before it's been made. Rather than base my investing decision on the hopes of great benefits coming from the unknown results of an acquisition, I'd rather base my decision on the fundamentals of the company, the proven history of the company, the actual return results, and the relation of the stock's price to its estimated value. Now, let's dive into this company to reveal the facts and to see what the future might hold.

Snapshot of the Company

Greenbrier Companies, Inc. is a leading designer and manufacturer of railroad freight car equipment in North America and Europe. It also manufacturers marine barges, provides railcar refurbishment and parts, and handles leasing services to the railroad and related transportation industries in North America.

A fast way for me to get an overall understanding of the condition of the business is to use the BTMA Stock Analyzer's company rating score. It shows a score of around 74/100. Therefore, Greenbrier Companies is considered to be a good company to invest in since 70 is the lowest good company score. GBX has high scores for 10-Year Price Per Share, ROE, and Ability to Recover from a Market Crash or Downturn. It has mediocre scores for ROIC, Gross Margin Percent, and PEG Ratio. It has a low score for earnings per share. In summary, these findings show us that GBX seems to have slightly above average fundamentals.

Before jumping to conclusions, we'll have to look closer into individual categories to see what's going on.

(Source: BTMA Stock Analyzer )

Fundamentals

Let's examine the price per share history first. In the chart below, we can see that price per share has been in upswings and downswings through the last decade but has generally been increasing. Overall, share price average has grown by about 174.7% over the past 10 years or a compound annual growth rate of 11.88%. This is a decent return but nothing spectacular.

(Source: BTMA Stock Analyzer - Price Per Share History)

Earnings

Looking closer at earnings history, we see that earnings haven't grown consistently over the past 10 years. The earnings have been growing, in general, through the last decade, but EPS has been volatile. EPS grew last year after declining in the two years prior.

Inconsistent earnings make it difficult to accurately estimate the future growth and value of the company. So, in this regard, GBX is a poor candidate of a stock to accurately estimate future growth or current value.

(Source: BTMA Stock Analyzer - EPS History)

Since earnings and price per share don't always give the whole picture, it's good to look at other factors like the gross margins, return on equity, and return on invested capital.

Return on Equity

The return on equity had decreased in 2016 and 2017 before increasing last year. Five-year average ROE is good at around 21%. For return on equity (ROE), I look for a 5-year average of 16% or more. So, GBX does meet my requirements; however, it is worrisome that ROE has declined overall in the past five years.

(Source: BTMA Stock Analyzer - ROE History)

Let's compare the ROE of this company to its industry. The average ROE of 10 Transportation (Railroads) companies is 51.74%.

Therefore, Greenbrier's 5-year average of 20.7% and current ROE of 13.4% are well below average. This is another red flag for Greenbrier.

Return on Invested Capital

The return on invested capital has increased last year which comes after a two-year decline. Five-year average ROIC is below average at around 14%. For return on invested capital (ROIC), I also look for a 5-year average of 16% or more. So, GBX does not pass this test, and Greenbrier receives another red flag since the ROIC has also decreased overall during the past five years.

(Source: BTMA Stock Analyzer - Return on Invested Capital History)

Gross Margin Percent

The gross margin percent (GMP) has been decreasing for the last 3 years. Five-year GMP is poor at around 18%. I typically look for companies with gross margin percent consistently above 30%. So, GBX has not proven that it has the ability to maintain acceptable margins over a long period. So far, the fundamentals of Greenbrier are worse than I had expected when I really started to examine this company more closely.

(Source: BTMA Stock Analyzer - Gross Margin Percent History)

Looking at other fundamentals involving the balance sheet, we can see that the debt-to-equity is less than 1. This is a good indicator, telling us that the company owns more than it owes.

GBX's Current Ratio of 2.9 is good, indicating that it has a good ability to use its assets to pay its short-term debt. Ideally, we'd want to see a Current Ratio of more than 1, so GBX exceeds this amount.

According to the balance sheet, the company seems to be in good financial health. In the long term, the company seems stable in regards to its debt-to-equity. In the short term, the company's financial situation is satisfactory.

The Price-Earnings Ratio of 13.7 indicates that GBX might be selling at a low price when comparing GBX's PE Ratio to a long-term market average PE Ratio of 15. The 10-year and 5-year average PE Ratio of GBX has typically been between 10.8 and 12.9, so this indicates that GBX could be currently trading at a high price when comparing GBX's average historical PE Ratio range.

GBX currently pays a dividend of 2.81% (or 2.86% over the last 12 months).

(Source: BTMA Stock Analyzer - Misc. Fundamentals)

Value Vs. Price

For valuation purposes, I will be using an adjusted diluted EPS of 2.58. I've used various past averages of growth rates and PE Ratios to calculate different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, Book Value, and Total Equity.

In the table below, you can see the different scenarios, and in the chart, you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is towards the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.

(Source: Wealth Builders Club)

According to this valuation analysis, GBX is overpriced.

  • If GBX continues with a growth average similar to its past 10 years' earnings growth, then the stock is slightly overpriced at this time.
  • If GBX continues with a growth average similar to its past 5 years' earnings growth, then the stock is overpriced at this time.
  • If GBX continues with a growth average similar to its past 10 years' book value growth, then the stock is overpriced at this time.
  • If GBX continues with a growth average similar to its past 5 years' book value growth, then the stock is overpriced at this time.
  • If GBX continues with a growth average similar to its past 5 years' total equity growth, then the stock is overpriced at this time.
  • According to GBX's typical PE ratio relation to the S&P 500's PE Ratio, GBX is undervalued.
  • If GBX continues with a growth average as forecasted by analysts, then the stock is overpriced.

This analysis shows an average valuation of around $28 per share versus its current price of about $35, this would indicate that Greenbrier is overpriced.

Forward-Looking Conclusion

According to the facts, Greenbrier Companies is financially healthy in a long-term sense in having enough equity as compared with debt, and in the short-term because the current ratio indicates that it has enough cash to cover current liabilities.

Other fundamentals are worrisome, including weak margins, declining ROE and ROIC, plus a volatile earnings history.

Lastly, this analysis shows that the stock is overpriced.

Predicted Growth

"Over the next five years, the analysts that follow this company are expecting it to grow earnings at an average annual rate of 9.5%. This year, analysts are forecasting earnings decrease of -12.29% over last year. Analysts expect earnings growth next year of 8.53% over this year's forecasted earnings." (Source: Forecast Earnings Growth)

If you invest today, with analysts' forecasts, you might expect about 9.5% growth per year. Plus we'll add the current 2.81% forward dividend. This brings the annual return to around 12.31%.

If considering actual past results of Greenbrier Companies, which includes affected share prices, and long term dividend yields, the story is a bit different. Here are the actual 10- and 5-year return results.

______________

10-Year Return Results if Invested in GBX:

Initial Investment Date: 5/14/2009

End Date: 5/14/2019

Cost per Share: $7.27

End Date Price: $34.99

Total Dividends Received: $4.13

Total Return: 438.10%

Compound Annualized Growth Rate: 18%

_______________

5-Year Return Results if Invested in GBX:

Initial Investment Date: 5/14/2014

End Date: 5/14/2019

Cost per Share: $50.35

End Date Price: $34.99

Total Dividends Received: $4.13

Total Return: -22.30%

Compound Annualized Growth Rate: -3%

From these scenarios, we have produced results from -3% to 18%. As you can see, the company's more recent 5-year return history has been much worse than the 10 year return history. The company has shown that it is declining in regards to fundamentals and actual return performance. I feel that because of Greenbrier's declining patterns, volatile earnings, and overpriced valuation, it is not currently a good investment choice for me. There are other better companies that are undervalued and offer more potential upside with less risk. Even investing in a low-fee S&P 500 index fund should offer as good or better returns as GBX with less risk.

Even if the acquisition of American Railcar turns out to be a successful business move, it will likely still take about a year to better understand what kind of positive effect the transaction will have on GBX.

For these reasons, I'm passing on GBX.

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.