The energy industry drives a large part of the overall economy. Not only do exploration and production companies thrive when oil prices rise, but the companies that provide the necessary services that producers need in order to get oil and other energy products to market also see their revenue and profits increase.
One such company is Greenbrier (NYSE:GBX), which manufactures rail cars. A lack of pipeline services to many of the most successful shale oil plays has led to a big rise in the use of tanker cars to deliver crude by railroad, and Greenbrier rode the wave of energy's boom in the early 2010s to all-time highs. When oil prices plunged, so did Greenbrier's shares, but as its fiscal third-quarter earnings report shows, the rebound in crude has helped drive demand for its rail cars at the same time that other factors are helping the company thrive.
How Greenbrier is taking advantage of rising oil
Greenbrier's fiscal third-quarter results continued a string of good results from the rail car manufacturer. Revenue came in at $641.4 million, soaring by 46% from year-ago levels. Net income attributable to Greenbrier inched higher by less than 1% to $33 million, but after taking into account some extraordinary items, adjusted earnings of $1.30 per share managed to outpace the consensus forecast among those following the stock for $1.14 per share.
One thing holding Greenbrier back was a one-time goodwill impairment charge related to its joint venture with repair, refurbishment, and maintenance specialist Watco. The charge amounted to $9.5 million, costing Greenbrier $0.29 per share on a GAAP basis.
Even with that bad news, Greenbrier's operational results more than made up for it. Orders jumped to 6,000, nearly doubling from the pace in the fiscal second quarter, and their value of more than $600 million helped give the company an impressive book-to-bill ratio of 1.1, its highest in a year. Deliveries also moved higher, to 5,600 units, and that helped push Greenbrier's backlog up to 24,200 units, with a value of roughly $2.3 billion in total. A better mix of sales led to more favorable gross margin figures for the rail car manufacturer.
From a segment perspective, Greenbrier had solid success. The company's manufacturing segment managed to keep most of its financial metrics relatively flat compared to the fiscal second quarter, sustaining its big gains compared to year-ago figures. Sales and operating margin in the wheels and parts segment helped support overall growth, and the leasing and services unit took advantage of stronger syndication activity to keep sales moving higher.
CEO William Furman had good things to say about Greenbrier's progress. "With North American railcar loadings increasing and improving indicators for the U.S. and global economies," Furman said, "current industry fundamentals remain favorable for most of Greenbrier's business segments." The CEO also sees the company's strategy to take a measured approach in dealing with opportunities both domestically and internationally working well.
What's ahead for Greenbrier?
There's a lot of optimism about the rail car company's prospects. Greenbrier sees order activity as "broad-based and diversified" as conditions in North America improve, with oil prices helping to generate greater interest in tanker cars in particular. Even in the struggling joint venture with Watco, Greenbrier's plans include ways to address the unit's underperformance in a way to lead to eventual improvement in the company's overall financial strength.
Just about the only downside came from the focusing of expectations that Greenbrier made. The company guided investors to the lower half of its previous range in terms of rail car deliveries, with expected counts of between 20,000 and 21,000 units for the year. Revenue should hit $2.5 billion, the midpoint of previous guidance, and earnings expectations for $5 per share were unchanged from Greenbrier's most recent forecast three months ago.
Even so, oil could support Greenbrier going forward. As Furman explained in the conference call, higher production in the Permian Basin and elsewhere is boosting carloads for railroad companies, necessitating greater use of tanker cars. Intermodal rail loadings are also near all-time highs, reflecting the strength of the U.S. economy. The CEO pointed to recent announcements from OPEC limiting production as positives for the domestic oil transportation business.
Greenbrier shares quickly rose more than 10% immediately following the earnings announcement, and in the weeks since, the stock has hit its best levels since 2015. If oil can keep delivering higher prices, then the rail car manufacturer is in a good position to benefit from the resulting positive impact on demand for tanker cars.