Is Greenbrier's Stunning Oil-by-Railroad Rally Over Yet, or Can It Roll On?

NEW YORK (TheStreet) -- Shares of Greenbrier (GBX), one of the biggest providers of transportation equipment and services to the North American railroad industry, have doubled this year. The stock was trading Tuesday at $65.45 as of 10:15 a.m.

But can the shares go any higher?

Last week, Greenbrier released its quarterly results that came in well over analysts' estimates. The company continues to grow based on strength in the U.S. energy and automobile industries. Moreover, the U.S. government is expected to introduce new regulations related to safety of crude-by-rail shipments, which should have a positive impact on Greenbrier's order book.

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Greenbrier's shares have risen by 100% this calendar year, closing at $65.85 on Monday. However, the company has lower enterprise value to annualized operating income and annualized revenues ratios as compared to the average of its biggest peers, American Railcar Industries (ARII), Westinghouse Air Brake Technologies (WAB) and Trinity Industries (TRN).

In other words, Greenbrier still has room for upside.

 

Symbol

EV-to-EBIT

EV-to-Revenues

American Railcar Industries

ARII

11.57

2.32

Wabtec Corp

WAB

16.91

2.96

Trinity Industries

TRN

5.83

1.56

Average

 

11.44

2.28

Greenbrier Companies

GBX

11.33

1.00

Greenbrier manufactures and sells its railroad freight-cars and equipment mainly in North America. The company reports its revenues under three segments: manufacturing, the backbone of Greenbrier; wheels, repairs and parts, which was responsible for more than a quarter of its annual revenues in 2013; and a small leasing and services business.

Over the last three years, Greenbrier's growth has been driven by the manufacturing segment due to increasing railcar deliveries. In 2013, the company reported manufacturing revenues of $1.2 billion, up more than 68% from 2011. On the other hand, the other two segments witnessed growth of less than 4% in the same period.

Last week, Greenbrier reported its third quarter results, in which its revenues increased by 18% from the previous quarter to $593 million due to higher deliveries. Improved efficiencies, better pricing and a favorable product mix pushed Greenbrier's gross margins to 16.3% from 11.5% in the second quarter. The company's profits more than doubled from $16 million in the second quarter to $33.6 million in the third quarter.

Greenbrier's backlog now stands at 26,400 units, valued at nearly $2.75 billion -- a 78.6% increase from the second quarter.

Greenbrier makes a variety of different railcars, but the company's growth is being fueled by its tank cars. Those can be used to transport crude oil and ethanol, thanks to the ongoing oil and gas revolution in the U.S.

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Moreover, booming shale oil and gas production has also spurred demand for Greenbrier's hopper cars, used to transport fracking sand.

With ever-increasing levels of oil production, the demand for tank cars could continue growing. Industry experts believe that the annual traffic could grow to a million carloads as early as this year, up from just 50,000 carloads in 2010.

Greenbrier is also benefitting from the rise in new car sales in the U.S. The company manufactures different types of railcars that are used in transportation of automotive products, such as Auto-Max railcars.

Amid the broader economic recovery, the U.S. has witnessed 4.3% year-over-year growth in vehicle sales in the first half of this year, despite fewer selling days than last year and the massive recall crisis. Consequently, the U.S. is on track to post the highest annual car sales numbers this year since the global recession began.

Meanwhile, a string of major accidents has heightened concerns related to shipments of crude oil, ethanol and other flammable products by rail. Answering the calls to enact tougher regulations on railcar safety, two weeks ago Canada's Minister of Transport Lisa Raitt announced new rules for transporting crude oil and other dangerous goods by rail.

The U.S. government might follow suit. This could work out well for Greenbrier, as railroad companies could start upgrading their fleet, causing a spike in demand for Greenbrier's latest railcars. Greenbrier's "tank car of the future," as it is described by Greenbrier's CEO William Furman, could give the company an edge over its competitors.

During a conference call held last week, Furman said that his company's vehicle "is up to eight times safer at any speed when measured against the legacy DOT-111 car" and "roughly two times safer than the state-of-the-art insulated and fully jacketed post 2011 CBT-1232 car."

The DOT-111 tank-car, designed four decades ago, is the only officially approved vehicle to transport crude oil.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates GREENBRIER COMPANIES INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate GREENBRIER COMPANIES INC (GBX) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, compelling growth in net income, good cash flow from operations, notable return on equity and solid stock price performance. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth greatly exceeded the industry average of 6.2%. Since the same quarter one year prior, revenues rose by 36.8%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Machinery industry. The net income increased by 159.9% when compared to the same quarter one year prior, rising from -$56.03 million to $33.59 million.
  • Net operating cash flow has significantly increased by 203.96% to $14.92 million when compared to the same quarter last year. In addition, GREENBRIER COMPANIES INC has also vastly surpassed the industry average cash flow growth rate of -3.24%.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Machinery industry and the overall market on the basis of return on equity, GREENBRIER COMPANIES INC has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
  • Powered by its strong earnings growth of 149.04% and other important driving factors, this stock has surged by 190.12% over the past year, outperforming the rise in the S&P 500 Index during the same period. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.

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