Why FreightCar America Earnings Could Plunge

FreightCar America (RAIL 2.54%) will release its quarterly report on Friday, and investors are expecting the worst. With expectations that FreightCar America earnings will go from a year-ago profit to a loss, investors have to wonder whether the company is missing out on a huge trend that's helping its competitors.

Railroad transport is a great way to move heavy commodities long distances in a cost-effective and energy-efficient way, and for years, FreightCar America benefited from high demand for commodities like coal by giving railroads the rail cars they needed to transport those commodities. But as coal volumes plunged in light of falling natural gas prices, railroads that were dependent on coal needed fewer railcars, hurting FreightCar's prospects. Let's take an early look at what's been happening with FreightCar America over the past quarter and what we're likely to see in its quarterly report.

Stats on FreightCar America

Source: Yahoo! Finance.

Why are FreightCar America earnings faring so badly?
In recent months, analysts have gotten downbeat about the prospects for FreightCar America earnings. They've reversed calls for a $0.09 profit for the June quarter and cut their estimates for the full 2013 year by $0.80 per share. The stock has responded with losses of about 14% since late April.

The reason for FreightCar America's recent earnings woes is pretty simple: With its specialty being coal cars, it was hugely affected by the fall in coal demand. FreightCar does make other types of cars, including container-transport cars, hopper cars for sand and aggregates, flat-cars for steel and equipment, and vehicle-carrier cars for auto and truck transport. But the company nevertheless has taken a big hit from coal, with its biggest customer by volume, Norfolk Southern (NSC 1.99%), having continued to see pressure from weakness in the coal industry.

But the real calamity is that FreightCar has missed out on the revolution in rail transport that's replacing old coal shipment volume. Union Pacific (UNP 1.16%) and Burlington Northern have both reaped huge rewards from helping energy producers transport oil out of hard-to-reach places like the Bakken play, helping to offset the reduction in coal shipments. That in turn has helped FreightCar rival Greenbrier (GBX 3.27%), which has reported substantial orders for high-margin tank cars. By contrast, FreightCar doesn't even list tank cars among its available offerings in its most recent annual report, strongly suggesting that it could entirely miss out on demand resulting from oil shipments, although it can hope that increased demand for crop transportation will boost its non-coal-car offerings.

In the FreightCar America earnings report, watch for signs about whether the company will make a strategic acquisition to get into the tank-car segment. With cash on its balance sheet, the company has the wherewithal financially to grow in that direction, and doing so could make a huge difference in its attempts to return to profitability sooner.

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