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.
