What to Expect From American Railcar's Earnings

Following a good set of earnings from Greenbrier, investors in American Railcar and Trinity Industries might be looking forward to their companies earnings reports with optimism. A look at what to expect.

Jul 15, 2014 at 2:17PM

After rival railcar manufacturer, Greenbrier Companies (NYSE:GBX) reported a strong set of earnings recently, investors in American Railcar Industries (NASDAQ:ARII) must be wondering if it and Trinity Industries (NYSE:TRN) have any upside going into their forthcoming earnings?

Greenbrier beats, American Railcar Industries next?
There are three factors that Fools need to focus on with the earnings of Greenbrier, American Railcar Industries, and Trinity Industries:

  • Railcar order books
  • Demand created by regulatory changes
  • The mix of railcars for sale (more upfront revenue) versus railcars for lease (longer term earnings and cash flow, but less upfront revenue)

The indications are that railcar demand is strong in 2014. Going back to American Railcar's last set of results (delivered at the start of May), management pointed out that the industry reported 24,050 railcar orders with 13,954 deliveries in the first quarter. In other words, the book-to-bill ratio stood at 1.72 for the quarter. Fast forward to Greenbrier's third-quarter results (released in early July for the quarter ending in May) and end market demand looks even stronger. Greenbrier reported 15,600 new railcar orders bringing its backlog to 26,400 and creating a book to bill of 3.6 in the quarter. In addition, Greenbrier reported 2,700 new orders since the end of the May quarter.

Regulatory changes impacting Trinity Industries, Greenbrier, and American Railcar?
Greenbrier shares increased 16% in the days following its results, as investors warmed to the strong order growth. Moreover, there was a sense of relief around the earnings, because industry speculators had begun to fear the impact of future changes in regulatory standards for tank cars. Railcars consist of hoppers (mainly used to transport loose bulk commodities) and tank cars (liquid and gaseous commodities). The latter has seen strong growth in recent years as part of the North American shale revolution.

But the Pipeline and Hazardous Materials Safety Administration, or PHMSA, is due to regulate on railcar designs for future tank cars. Quoting from Trinity Industries first quarter conference call at the end of April:

We are monitoring closely the potential regulatory actions of PHMSA, the U.S. Department of Transportation and Transport Canada with respect to changes in railcar designs for tank cars carrying flammable commodities. PHMSA recently proposed an accelerated timeline that we expect to lead to a final rule shortly after September 30, 2014. 

Indeed, Trinity's management had also outlined that tank orders "have slowed" in recent quarters, even while overall railcar industry orders were "very strong." It's difficult for the industry to know exactly how customers will react in waiting for the new regulations. Ultimately, they may prove to spur long-term demand in the industry because customers may need to order new tank cars, or at least make retrofit orders to existing tank cars.

The good news is that Greenbrier's backlog has around 40% in tank cars, and the company's management also outlined, "In tank cars, we expect substantial demand for tank cars as the regulations are finally sorted out." 

If Greenbrier's results are a good guide, than American Railcar and Trinity investors can expect a decent set of tank car orders in the upcoming results.

American Railcar, lease or sale?
Aside from the regulatory issue, American Railcar investors also face some variability in their company's earnings due to the mix of railcars that are sold or leased. Moreover, well-known investor Carl Icahn has an involvement. According to the company's annual report, a company that leases and sells its railcars, American Railcar Leasing, or ARL, is an affiliate of Carl Icahn. Furthermore, AEP Leasing (the biggest customer representing 31.7% of consolidated revenue) is also an affiliate of Carl Icahn. Given that Icahn was, until very recently, the chairman of American Railcar, it's fair to say he has had some influence of the mix of railcars sold or leased. Furthermore, the risk in this relationship is outlined in the company's 10-K:

We could compete directly with ARL or its affiliate, AEP, in our lease business if ARL or AEP provides a potential customer with better terms than what we would offer. ARL and AEP also lease railcars and therefore market our railcars and their own railcars to the same customer base.

Moreover, there is no obligation on ARL or AEP to continue to purchase all their railcars from American Railcar.

While the mix of railcars sold or leased shouldn't matter too much to investors in the long term (shifting to the latter tends to imply trading off more upfront revenue for long-term earnings and cash flows), it matters in the short term. Indeed, American Railcar's stock fell sharply (down 20% in the week after the results) after the first quarter results, because it missed earnings and revenue forecasts due to a shift to cars built for leasing.

As for the guidance for the second quarter, CEO Jeffrey Hollister indicated that direct sales might bounce back: "I mean in the first quarter I think you are going to see a little stronger mix on the lease side. The second quarter it might bounce back more on a direct sales side." 

Where next for American Railcar?
All told, the industry backdrop remains positive. Greenbrier's results give notice that end demand isn't falling off a cliff thanks to regulatory uncertainty and American Railcar and Trinity Industries can expect decent tank car orders as well. Probably, the biggest short-term issue that American Railcar investors face is the mix of lease versus direct sale railcars in the quarter, or more specifically, how the market reacts to it. Thinking longer term, the risk of Icahn's relationship with American Railcar changing in future is a possibility, but for now the company looks set for a decent set of results. In any case, investors can always look at Trinity or Greenbrier for stocks with exposure to the industry, but will less variability around their earnings.

Warren Buffett: This new technology is a "real threat"
At the recent Berkshire Hathaway annual meeting, Warren Buffett admitted this emerging technology is threatening his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. Find out how you can cash in on this technology before the crowd catches on, by jumping onto one company that could get you the biggest piece of the action. Click here to access a FREE investor alert on the company we're calling the "brains behind" the technology.

Lee Samaha 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers