New Safety Regulations to Boost Railcar Sales

Due to recent catastrophes and anticipated federal regulations, there could be explosive demand for new rail cars.

Feb 12, 2014 at 12:46PM

Recently, a train derailment near Casselton, ND, caused massive explosions. The catastrophe occurred when a train carrying soybeans derailed and fell onto an adjacent track, blocking the path of another train carrying crude oil. Federal authorities quickly investigated the incident, concluding the explosions were caused by the rupturing of an aging model of railcar, the DOT-111.

In response, lawmakers are considering new legislation that would outlaw these types of tank cars, among others. According to the American Association of Railroads, 85% of the 92,000 tank cars currently moving flammable liquids in the United States should be phased out or upgraded. Because of this, railcar manufacturers, including Trinity Industries (NYSE:TRN), American Railcar Industries (NASDAQ:ARII), and The Greenbrier Companies (NYSE:GBX), will see a large increase in sales.

Proposed regulations
"If this train happened to be the newer cars, the explosions may very well not have occurred" said John Risch, a legislative director for the International Association of Sheet Metal, Air, Rail and Transportation Workers.

These derailments are not rare events. Last November, a similar incident occurred in Alabama when a tanker carrying crude derailed and spilled oil into a nearby marsh. In August, a train derailed in Quebec and killed 47 people while demolishing dozens of homes. As one might expect, this has drawn the interest of regulators.

Some of the proposed changes include thicker tank cars to help prevent punctures and more strict identification and processing of oil moved by rail to reduce its flammability.

Sen. Ron Wyden (D-OR) and John D. Rockefeller recently co-wrote a letter to the Department of Transportation in which they stated, "the recent derailments and accidents involving crude oil are alarming and demand increased vigilance." The two believe it is important that the Departments of Energy and Transportation "understand and properly evaluate the safety of transporting crude oil by rail."

Companies that will profit
In its last quarterly report, Trinity Industries reported a backlog of 40,050 railcar orders worth nearly $5.1 billion. This represents a 52.3% year-over-year increase. The only problem for Trinity moving forward will be keeping up with demand. American Railcar Industries has a similar problem. Although it is a much smaller company, it still has a backlog worth $814.5 million.

Similarly, The Greenbrier Companies is sitting on a massive order backlog worth $1.5 billion. It is also getting ahead of regulators by offering safer tank cars before they are mandated. In a recent press release , Greenbrier claimed its new "Tank Car of the Future" design is "intended to meet anticipated new industry and government standards for tank cars transporting certain hazardous material."

The company goes on to say that it expects new regulations and is preparing to retrofit old cars with new parts to make them safer. This is great news for Greenbrier – the organization knows refineries will be looking to replace their outdated cars with new ones that will meet the anticipated government regulations. Further, it is very likely that Trinity and American will follow suit in the following months and offer safer tank cars or the ability to retrofit old DOT-111 models.

The bigger picture
It is important to remember that all of these safety regulations will come in conjunction with an already booming railcar industry. As Forbes magazine puts it in "The New Rail Boom," "thanks to leaps in technology the rising price of diesel and improved delivery speeds, more and more freight traffic has moved from roads to rails where trains can move one ton of goods about 500 miles on a single gallon of fuel."

According to the Federal Railroad Administration, tonnage of freight shipped by the U.S. rail system will increase 22% by 2035.

Adding regulations to an already booming rail industry means one thing: It looks like it's time to buy into railcar manufacturers. Many companies already have backlogs of shipments and, as more and more emphasis is placed on railcar safety, demand will continue to rise. As it does so, manufacturer revenues will continue to grow and profits will continue to expand. Don't miss your chance to hop on the railcar manufacturer train.

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Bryan Thomas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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