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Greenbrier Takes an Even Bigger Hit Than Expected

By Dan Caplinger – Oct 25, 2016 at 9:27AM

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Falling revenue and profit explain the railcar manufacturer's low apparent valuation.

Value investors like to screen stocks for low earnings multiples, and railcar manufacturer Greenbrier Companies (GBX 0.81%) has been a prominent stock in the results of such screens for a while. Yet although strength in the industry boosted its past earnings, Greenbrier has seen demand fall recently, and coming into Tuesday's fiscal fourth-quarter financial report, investors were prepared to see yet another big drop in sales and net income. Unfortunately, the railcar manufacturer announced even worse news than most had expected, and its guidance for 2017 points to a solid but still more modest reality for the company. Let's look more closely at how Greenbrier performed and what it sees ahead.

Image source: Greenbrier Companies.

How Greenbrier is faring in a slower railroad industry

Greenbrier's fiscal fourth-quarter results highlighted the acceleration of its business downturn toward the end of its fiscal year. Revenue of $595.2 million fell 22% from the year-ago quarter, which was even worse than the 22% drop that most investors were expecting from the railcar maker. Net income was also down sharply, declining by nearly half to $33.6 million. That produced earnings of $1.06 per share, which missed the consensus forecast among those following the stock by $0.08 per share.

Looking more closely at Greenbrier's financials, the biggest problem area for the company was in its manufacturing segment. Sales fell by more than a quarter there, compared to a more modest 12% decline for the wheels and parts business. As we've seen in past quarters, Greenbrier managed to produce growth in its leasing and services unit, but given that it only brings in about 6% of the company's total revenue, that success wasn't enough to make an appreciable dent in the lost sales elsewhere in the business. In addition, gross margin in the manufacturing and wheels and parts divisions fell substantially, with Greenbrier citing an unfavorable shift in product mix and a tough operating environment in general as factors hurting margin figures.

Operationally, Greenbrier shows signs of potentially getting close to the bottom in some metrics. Sequentially, railcar deliveries actually rose by 300 railcars to 4,600, ending a downward streak that had taken the figure down from 6,900 deliveries in the fiscal first quarter. Orders also climbed, rising to 2,300 units, 600 higher than in the fiscal third quarter. Once again, though, overall backlog saw substantial declines, with a drop of 3,700 units taking total railcar backlog to 27,500. The estimated value of those items, at $3.19 billion, is down more than $400 million over the past three months.

Greenbrier CEO William Furman explained some of the headwinds that the company faced during the fiscal year. "We addressed industry challenges during fiscal 2016," Furman said, "as we encountered a weaker market in North America." He also pointed to Greenbrier's strong balance sheet as helping the company stay poised to take advantage of future opportunities.

Can Greenbrier keep bouncing back?

Greenbrier is pushing to diversify its exposure away from its North American market to capture more opportunities globally. Furman noted the August purchase of a nearly 20% stake in Brazil's Amsted-Maxion Cruzeiro, expanding its manufacturing presence in the Latin American emerging market. At the same time, Greenbrier started fulfilling a key 1,200 tank-car order for the Saudi Railway Company, and it also formed the Greenbrier-Astra Rail venture to create what the CEO called "a world-class European railcar business [for] capitalizing on demand in Western Europe where the aging railcar fleet will enter a replacement cycle in the next few years."

For the most part, the financial guidance that Greenbrier gave for its 2017 fiscal year was in line with what those following the stock were expecting to see. The railcar manufacturer expects to produce revenue of $2 billion to $2.4 billion, which compares relatively favorably with the $2.1 billion consensus forecast among investors. On the earnings front, guidance for $3.25 to $3.75 per share has a midpoint slightly weaker than the current investor estimate of $3.55 per share, and deliveries of 14,000 to 16,000 units would be a roughly 20% to 30% decline from fiscal 2016 levels.

Greenbrier's stock didn't immediately react to the news in pre-market trading following the announcement, but some will inevitably be disappointed with its failure to hit the targets that investors had set for the railcar specialist. Nevertheless, by focusing on long-term prospects, Greenbrier is putting itself in position to see its fundamental business perform better in the years to come.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Greenbrier Companies. 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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