The railroad industry has gone through some tough times over the past year, and the reduction in demand for transportation for commodities and other key products has taken its toll on companies like Greenbrier (GBX 3.15%) and Trinity Industries (TRN 2.97%), both of which make railcars. Coming into Tuesday's fiscal second-quarter financial report, Greenbrier investors were prepared for a slowdown in earnings, but they still anticipated healthy double-digit percentage revenue growth that would reflect the ongoing need among its customers for new railcars. Greenbrier's results were disappointing, and they cast a new shadow over the industry that could hurt both it and Trinity going forward. Let's look more closely at Greenbrier and how it did last quarter.
Greenbrier slows down
Greenbrier's fiscal second-quarter numbers fell short on multiple fronts. Revenue was up 6% to $669.1 million, but that didn't come close to matching the 16% growth rate that investors were looking to see. The bottom line produced even worse news, as net income attributable to the company fell 11% to $44.9 million. That produced earnings of $1.41 per share, which was $0.15 below the consensus forecast among those following the stock.
Looking more closely at Greenbrier's numbers, you can see a huge shift in its mix of business. Revenue from the key manufacturing segment was down 10% year-over-year, and the wheels and parts category saw similar 12% declines. Offsetting those drops was a nearly six-fold increase in revenue from leasing and services, which stemmed from the sale and syndication of an acquired railcar portfolio. However, those gains came at the expense of margins for the segment, as operating margins in particular got cut in half from where they were in the fiscal first quarter.
Sequentially, Greenbrier's numbers tell a similar story. Lower deliveries sent manufacturing revenue down 35%, and deliveries fell from 6,900 railcars in the fiscal first quarter to 4,500 railcars last quarter. Orders of 3,000 railcars represented a nice rebound from the fiscal first quarter, but backlogs also fell again, losing 1,900 units to 34,100.
Greenbrier CEO William Furman put the performance in context. "Greenbrier is adapting well to the present industry and economic climate," Furman said, "with non-energy related railcars representing 83% of our total backlog." The CEO believes that the way it does business should help it fend off competition from Trinity Industries and other players in the industry.
Can Greenbrier speed up?
Greenbrier thinks it's still on track to reach its full-year guidance on the delivery, sales, and earnings per share fronts. As Furman notes, "Our health backlog and our integrated business model ... position us for steady performance into 2017 and beyond."
In response, Greenbrier refined its full-year guidance. The railcar maker pushed the top end of its expected delivery range by 500 railcars, now expecting 20,000 to 22,000 deliveries. Revenue will still be greater than $2.8 billion as originally predicted, and Greenbrier narrowed its earnings range by a nickel on both ends, now projecting $5.70 to $6.10 per share.
Still, the ridiculously low valuations for both Greenbrier and Trinity show that investors have no confidence in the companies being able to sustain current levels of profitability. Greenbrier's forward multiple based on its full-year projections is less than 5. Trinity has a trailing earnings multiple of less than 4, but investors in both stocks believe that earnings will plunge by 2017.
Greenbrier shareholders didn't like the shortfall in earnings, sending the stock down 4% in early morning trading following the announcement. Until signs of life start to emerge from the global economy generally and the transportation sector in particular, it will be tough for Greenbrier to deliver the outpaced growth that investors would like to see.