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FreightCar America Still on Track?

By Sham Gad - Updated Nov 15, 2016 at 12:07AM

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Will a temporary decline in demand send it off the rails?

Earlier this month, railroad freight car manufacturer FreightCar America (NASDAQ:RAIL) reported first-quarter earnings of $1.80 per diluted share on sales of $322.5 million compared to $1.67 per diluted share on sales of $292.8 million for the comparable 2006 period. Despite trading near 52-week lows, FreightCar could be on track in no time if management can overcome near-term challenges.

FreightCar America primarily produces rail cars for the coal industry, with over 90% of sales coming from coal-carrying cars in 2006. During the first quarter of 2007, 22% of FreightCar's revenues actually came from non-coal-carrying cars compared to zero for the comparable quarter. This is a positive indication that the company is shifting its product mix.

Currently, the company has experienced softening demand in future rail car orders. According to the release, FreightCar America's backlog for future unfilled orders was just above 6,000 units, compared with more than 9,300 units at the end of 2006 and 17,974 units on March 31, 2006. So while earnings probably won't come in anywhere near the levels of 2006 -- the business earned over $10 a share after special items and thus had a P/E multiple in the mid-single digits -- management seems focused on maintaining a tight lid on expenses going forward. Management also mentioned the possibility of future potential business activities in India, although it didn't go into great detail during the conference call.

The company's balance sheet is impeccable with almost $15 in net cash per share and management is buying back stock. The shares have been changing hands near the 52-week low of $45 a share, but you are really paying $30 after stripping out the cash for a company that has already earned almost $2 this quarter in a weak environment. We Fools like to look ahead, and I see continued demand for coal and other commodities. With rising fuel prices, railroads will feel a pinch, but not nearly as severe as the trucking industry. To be sure, accounts receivables were up nearly six-fold during the quarter, but that was due to specific terms and conditions with one customer in which the payment was received in April and could not be reported during the first quarter.

It's not hard to see that with such a juicy balance sheet, several things could happen. FreightCar could pay a one-time special dividend; or it could become a very attractive acquisition to one of its partner rail companies or Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), given Mr. Buffett's newfound interest for Burlington Northern Sante Fe (NYSE:BNI) and Union Pacific (NYSE:UNP).

For related Foolishness, check out "Buffett Tracking Two More Railroads."

Berkshire Hathaway is a Motley Fool Inside Value recommendation as well as a Stock Advisor pick.

Fool contributor Sham Gad is about to launch Gad Investment Partners Fund, a value-centric fund inspired by Graham, Buffett, and Pabrai. He owns shares of Berkshire Hathaway. The Fool has a disclosure policy.

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Stocks Mentioned

FreightCar America, Inc. Stock Quote
FreightCar America, Inc.
RAIL
$4.95 (0.41%) $0.02
Union Pacific Corporation Stock Quote
Union Pacific Corporation
UNP
$241.05 (0.07%) $0.16

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