When Warren Buffett substantially bolstered his holdings in railroad companies with the November 2009 purchase of Burlington Northern, he sparked interest in a cyclical industry that had nearly hit rock bottom. Looking back, it was outstanding timing, as, for example, the value of sector stocks such as Union Pacific Corporation (NYSE:UNP) and CSX Corporation (NYSE:CSX) have risen more than threefold since that time.
At the same time, some companies that are complementary to the railroad industry have also made for nice stocks, and might continue to be favorable holdings. Specifically, a railcar manufacturer, The Greenbrier Companies Inc (NYSE:GBX) and GATX Corporation (NYSE:GMT), a railcar leaser, both offer price upside potential.
Unfavorably, Greenbrier Companies Inc (NYSE:GBX)’s outlook for railcar deliveries in 2013 was most recently at 13,000 units, down from the 2012 total of about 15,000. That 2012 figure reflected a 60% jump from the prior year. Thus, business remains strong but less robust than a year ago.
The slowdown in demand has spurred management to take steps necessary to shore up productivity. It is aiming to bring operating costs in line with sales, and should benefit from margin expansion in the near term.
Furthermore, Greenbrier Companies Inc (NYSE:GBX) is redeploying cash to higher-return investments. It promises a wider-margined product mix. The overall backlog, though down from last year, rose from November to February, to 11,700 railcars from 9,700.
The factor that piqued my interest in this stock initially was its low P/E valuation and railroad industry presence. Investors will have to endure subdued profit comparisons for now. But, gross margin expansion ought to result from cost-cutting initiatives and return-on-capital is apt to climb thanks to debt paydown and share buybacks. In all, the stock, recently at an all-time high, is worth a look at this time.
GATX’s profits growing thanks to sharp rate hikes
GATX Corporation (NYSE:GMT) is primarily a leaser of railcars in the U.S. and Europe that had previously been restrained by weak asset utilization that was limiting rates. Conditions have improved significantly, allowing for pricing increases on a year over year basis of more than 30% in the last two quarters. Renewals are now being contracted at more lengthy terms and utilization remains strong. All of this should result in share-earnings growth upwards of 10% this year.
Earnings are likely to demonstrate enhanced stability behind the higher rates and extended terms. The possibility that overcapacity, stemming from excess expansion in the oil market, will again be a hindrance is muted by this strategy. GATX Corporation (NYSE:GMT) is up against pipeline operators in the market for crude oil transportation and will probably lose share, due to the greater efficiency of that mode of storage.