You can have that opinion, but if you don't have a view on the UP warranty claim, then your view has no basis.
The math here is daunting: the contract with UP was supposed to be $150m. Warranty provides for a 150% compensation. Worst case simple math is $150 x 1.5 = $225m. Typically these claims are settled after some lengthy negotiations. But if UP received 1.5m ties starting 6(?) years ago, and they wait until now to file a warranty claim, what's that about? I have no clue how this shakes out, but the downside is potentially HUGE, so I don't see the stock recovering until there is some reasonable clarity on this warranty issue.
The sales for years 2008, 2009, 2010 per 2010 10K were about $44MM for the ties under Warranty Claim. Since first two years were initial years of contract, lets assume they same as average of three years above. Therefore total sales are approximately $70MM.
If 100% of these ties need replacement, we would incur COGS for $70MM X 1.5 to manufacture new ties and FOB to UPRR.
However, since this was the first time reported after 5 years of delivery and 'Significant amounts' were specified by the UPRR claim, lets us assume 50% damage as a worst case. If you also consider the relationship with UPRR is mostly cordial, as they are still receiving ties from two other locations and apparently no questions have been raised and Q&A of management conference calls, I believe 50% is a overkill.
If we factor in 50% returns, at current sales we arrive at $40-$50MM in warranty claim. Since ties have to be re-manufactured, we can present value this high end of $50MM at any discount factor, we will arrive at an estimated range of $32MM to $38MM charge to the company.
I believe the current selloff of about $150MM is an over reaction when compared to $40MM charge (in the worst case). I will not be surprised if management newly hired consultants can get this number further down to more reasonable level.
I believe, this may be the reason six different insiders have aggressively purchased shares (notice, there were no purchases for several years before). I am encouraged by CEO, who announced retirement recently has expended $200K for the purpose.
I expect, these shares to move higher in a short notice.
I tend to agree with you and your figures. I have been a long time holder since the DM&E days. I took advantage of what I saw as an overreaction and added. The company has solid financial position to weather either case laid out in your scenarios.