A combination of both the domestic economic recovery and the oil-by-rail boom has been a shot in the arm for rail companies during the past year or so. This surging demand shows no sign of letting up just yet, which is great news for the three main railcar leasing and manufacturing companies: American Railcar Industries (NASDAQ: ARII), Trinity Industries ( TRN -0.61% ), and The Greenbrier Companies ( GBX 0.88% ).
According to data from the Association of American Railroads, during the third week of March, total combined U.S. weekly rail traffic was 545,366 carloads and intermodal units, up 7% compared with the same week last year. However, the number of crude oil cartloads moved by rail showed an even more impressive increase. The AAR reported that 108,590 carloads of crude were shipped during the fourth quarter of 2013, bringing total crude movements for the year to 407,642 carloads; this was a 74% increase over the 233,819 carloads transported during 2012. That said, during 2013 crude oil only accounted for 1.4% of total cartloads.
With the volume of railroad traffic within the U.S. continuing to grow, it is likely that the railcar leasing market will have another strong year as new cars are brought online to meet demand.
Smaller is better
American Railcar Industries is one of my personal favorite railcar companies. It is also the smallest company in terms of market capitalization discussed here.
American Railcar manufactures railcars of multiple styles, which is in itself a lucrative business as rail traffic rises. However, the company is also building its own railcar leasing division, and profits are already flowing in. American Railcar reported a strong 21% rise in adjusted earnings before interest, tax, amortization, and depreciation for full-year 2013; this was thanks to a combination of two factors. Firstly, the company managed to improve the gross margin by 10%, from 20.8% to 23.8%. Secondly, it also reported a 140% jump in railcar leasing revenue.
Now, railcar leasing is an extremely lucrative business to be in and American Railcar is reaping the benefits from moving into this market. For example, the company's gross margin from leasing was 58% during 2013, while the gross margin from manufacturing was only 22%. Railcars tend to be leased on contracts lasting several years, which locks in cash flow. The company is continuing to expand its fleet as well, with 2,330 railcars for lease in its manufacturing backlog. American Railcar's backlog also includes 8,560 railcars for other customers, most of which are tanker cars that are required to keep up with the oil-by-rail boom. After a 36% jump in earnings during 2013, American Railcar's future looks bright with analyst forecasting a 13% jump in earnings this year.
A more diversified play
Like American Railcar, Trinity Industries is in the business of railcar manufacturing and leasing. The company is also involved in barge manufacturing, construction services, and more. It's even a major wind-tower maker.
Over the past four years, Trinity has really benefited from the economic recovery in the United States. This is set to continue as rail traffic keeps expanding. Trinity Industries' revenue has averaged annual growth of 33% during the past four years, while earnings growth has averaged 115% per annum. Further, Trinity is actually a key part of the U.S. domestic rail infrastructure as the company is a market leader, essential to any rail recovery. During 2013, Trinity shipped 24,335 railcars, representing 46% of industry shipments during the year. The company also received orders for 32,240 railcars, representing 49% of the industry total during the year. At year end, the company's backlog for rail cars orders represented 55% of total industry backlog, worth around $5 billion.
The oil-by-rail boom, although lucrative for some, has led to a number of fatal accidents, and many are now calling for tougher regulations to be brought in. according to The Greenbrier Companies CEO William Furman, around 80,000 tanker cars don't meet current safety standards and need to be replaced or retrofitted. This massive overhaul is going to be a boon for tanker manufacturers like Greenbrier, American Railcar, and Trinity.
Greenbrier is rising to this upcoming challenge, and in the words of Furman the company is "well positioned to respond" to shippers' retrofitting or new build needs. The company has announced that that it will design a new generation "Tank Car of the Future" for rail transport of hazardous freight, including flammable crude oil and ethanol, that can better withstand the additional demands associated with operating unit trains.
In North America, Greenbrier can build tank cars at a rate of 4,000 cars per year. It is increasing its capacity in light of higher demand for tank cars related to the energy renaissance in America. As of Nov. 30, 2013, 47% of Greenbrier's backlog consisted of tank cars .
Overall, Greenbrier, Trinity, and American Railcar all look well placed to ride the U.S. rail resurgence. However, Trinity, with its diversified operations and near 50% share of the U.S. railcar manufacturing capacity, looks to be in the best position to benefit in the long term.