In the last seven years from 2005 to 2011, FreightCar America delivered positive free cash flow in five of these seven years with a single year of loss in 2010. It has low margin stability, with gross margin fluctating wildly from 6% to 15% in its last six profitable years, reflecting the cyclical nature of the industry. FreightCar America has a strong balance sheet with no debt outstanding and net cash and short term investments representing 45% of its current market capitalization. It stopped paying dividends after 2009, before reinitiating dividend payment in 2012 and currently sports a dividend yield of 1%.
Competitor Analysis
FreightCar America has three listed competitors in the North American railcar market that primarily manufacture railcars for third-party customers, which are Trinity Industries, Inc. (NYSE:TRN), The Greenbrier Companies Inc (NYSE:GBX) and American Railcar Industries, Inc. (NASDAQ:ARII). All four of them including FreightCar America achieved similar trailing twelve month ROEs of 12%-13%, but FreightCar America is significantly cheaper and safer. Its three listed competitors have debt-to-equity ratios ranging from 50% to 150%, while FreightCar America is debt free. FreightCar America is trading at three times EV/EBITDA, half the valuation multiples of its listed competitors, as Trinity Industries, Greenbrier Companies and American Railcar Industries trade at six to seven times EV/EBITDA.
Investment Risks
FreightCar America faces significant customer concentration risk, as a result of the nature of the industry where railcars are typically sold in the form of large, periodic orders. Most of its individual customers place orders for products on an as-needed basis, sometimes only once every few years, since they do not need to replace, replenish or increase their railcar fleets on a yearly basis. FreightCar America largest customer accounted for 53% and 63% of its 2011 and 2010 sales respectively.
FreightCar America’s current supplier for roll-formed center sills for its railcars, primary longitudinal structural components of railcars which help withstand the weight of cargo, is its sole supplier. Any disruption in roll-formed center sills from this supplier could adversely affect FreightCar America’s business.
As of Dec. 31, 2011, FreightCar America’s pension obligations were underfunded. Its accumulated benefit obligation under defined benefit pension plans exceeded the fair value of plan assets by $14.1 million. It also had collective bargaining agreements with unions representing approximately 46% of its total active labor force, and an unfunded $65.1 million accrual for its projected retiree health care costs.
Conclusion
FreightCar America boosts of cheaper valuations and a stronger balance sheet than its listed competitors, despite delivering similar trailing twelve months ROEs.
The article FreightCar America: Cheaper And Safer Than Peers originally appeared on Fool.com and is written by Mark Lin.
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