Should You Join Carl Icahn in Greenbrier?

ICAHN CAPITAL LPShares in The Greenbrier Companies (NYSE:GBX) rose about 15% on November 13th after billionaire Carl Icahn’s money management group reported that it had acquired 10% of the company’s shares outstanding, or 2.7 million shares. Icahn indicated that he was interested in exploring “strategic opportunities” for the manufacturer of railcars. His most recent 13F filing reported a steady position in American Railcar Industries, Inc. (NASDAQ:ARII); that company’s shares were up over 10% as the market speculated that Icahn may intend to push a merger between the two (something that he had actually pursued in 2008). Find more stocks that Icahn owns, including our take on the billionaire’s recent purchase of Netflix shares.

The railcar industry is tied to changes in the railroad industry, which in turn derives much of its business from the transportation of freight. The Greenbrier Companies therefore has a high beta of 3.3 which reflects how sensitive its business is to the broader economy. Looking at the company’s 10-K (Greenbrier has a fiscal year ending in August), revenue in the last fiscal year was more than double what it was in the fiscal year ending in August 2010; in that year, revenue had been down 41% from its level in the fiscal year ending in August 2008. Earnings show a cyclical pattern as well, with the company’s net income of about $120 million representing a large increase over the previous few years.

In terms of P/E multiples, The Greenbrier Companies is cheap- 8 times trailing earnings, with analyst consensus for 2013 placing it at 7 times forward earnings estimates- but we’ve seen that the business swings wildly with respect to economic conditions. The most recent data has 11% of the shares outstanding held short, and the stock is down 37% over the last year against a rising market. So there clearly was quite a bit of skepticism regarding the company’s prospects before Icahn bought in.

The closest peers for Greenbrier are American Railcar, which we’ve already mentioned is another Icahn pick, and railcar lessor GATX Corporation (NYSE:GMT). These companies trade at trailing P/E multiples in the 14-15 range, representing a substantial premium to Greenbrier. Wall Street analysts are much more bullish on American Railcar, with its forward P/E falling to 9 while GATX is expected to see very little growth. Both of these companies have standard December fiscal years and reported strong growth last quarter, with earnings up at least 60% from the third quarter of 2011. That is in keeping with the general increase in demand for railcars that also benefitted Greenbrier. As a result, we’d say that Greenbrier looks like a good pick for investors who want to take on the risk inherent in this business.

We can also look at railroads directly, such as Union Pacific Corporation (NYSE:UNP) and CSX Corporation (NYSE:CSX). The industry as a whole carries the Warren Buffett seal of approval as can be seen by Berkshire Hathaway’s purchase of Burlington Northern Santa Fe, and these two particular railroads have betas less than 1.5 and so offer less macro risk. They are also considerably larger companies, with CSX posting a market cap of about $20 billion and Union Pacific trading at almost three times that value. CSX’s business was about flat last quarter versus a year earlier while Union Pacific saw moderate earnings growth. Their respective earnings multiples reflect that CSX is a somewhat weaker business- its trailing P/E of 11 is a significant discount to Union Pacific- though with that company trading in the same range as American Railcar and GATX we’d say that either railroad looks like a better value than those two companies.

We think that an investor would be well served by going after the railroads directly unless they are very confident in U.S. macro and want as much exposure to railcar demand as possible. In that case, it’s a good idea to follow Icahn into Greenbrier as that company still looks undervalued compared to its peers.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!