Why Greenbrier Companies Decoupled in September

Negative commentary from one prominent Wall Street firm and a struggling commodities market spelled trouble for Greenbrier in September.

Sean Williams
Sean Williams
Oct 5, 2015 at 11:05AM

GBX Chart

GBX data by YCharts.

Shares of Greenbrier Companies (NYSE:GBX), a manufacturer of freight cars and freight car equipment in North America and Europe, as well as barges, decoupled from the bull market in September and moved lower on the month by a jaw-dropping 23% based on data from S&P Capital IQ.

What was to blame?

For starters, Greenbrier received no love from Wall Street despite its declining share price. In fact, Wells Fargo downgraded Greenbrier from 'outperform' to 'market perform' (essentially the equivalent of 'buy' to 'hold') on Sept. 21, 2015, and slashed its price target by nearly 40%. Wells Fargo cited "a moderating U.S. industrial environment" as the reason for the downgrade, and pointed out that it would be upbeat about the railcar sector if freight traffic improved, tank car demand were more visible, and lease rates stabilized.

The other issue Greenbrier dealt with last month isn't as front-and-center as a downgrade. As a manufacturer of tank cars, Greenbrier is dependent on a strong oil and gas industry for demand. With oil prices weakening once again, the prospect for tank car orders has lessened in the United States (and tank cars usually carry hefty price tags and healthy margins). Additionally, weakness in other commodities, such as coal, have hampered demand up and down heavy-duty supply chains. From industrial giants like Caterpillar to logistics providers, there appears to be little escaping the prospect of a slowdown caused by commodity price weakness.

Source: The Greenbrier Companies. 

The question that should be asked here is whether the 23% loss in value on Greenbrier stock represents a buying opportunity or a warning flag to keep your distance.

While I do believe that the ripples of oil's plunge are still being priced into the railcar manufacturing sector, and that lower commodity prices have removed some of the urgency associated with ordering new railcars, Greenbrier does look like a possible bargain at current levels.

When considering a company like Greenbrier, you're betting on the long-term thesis that commodity demand for oil, coal, and pretty much any dry bulk or liquid transport is going to improve over time. Personally, that thesis seems like a no-brainer. It's just a matter of whether or not Greenbrier can fend off its competitors, maintain its debt, and handle the regular hiccups that the U.S. economy experiences. And, in my opinion it can.

What we're looking at right now is a railcar and railcar services company valued at a little more than five times forward earnings with a PEG ratio of a minuscule 0.45. Even if EPS expectations come down a bit, I suspect Greenbrier has enough of a buffer to be buoyed to the downside. Plus, its backlog actually rose in the second quarter to $4.86 billion from the sequential first quarter. Sporting a healthy backlog, I see plenty of reasons for opportunistic investors to take a deeper dive into Greenbrier.

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