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Railcar Demand Booms To Deliver Energy Windfall

Companies that make railcars rose sharply Thursday on better-than-expected earnings from key players as the domestic oil and gas boom spurs demand to transport that energy bounty.

Trinity Industries (TRN) shares shot up 10% and American Railcar Industries (ARII) nearly 15%, both hitting record highs a day after they beat fourth-quarter sales and earnings views.

Fellow railcar company Greenbrier (GBX) jumped 6% to a seven-year high.

Shares of Wabtec (WAB), a maker of equipment for locomotives and railcars that also reported results Wednesday, rose 3% to a new record high.

All of these stocks are part of the Transportation-Equipment Manufacturing group, which ranks No. 17 out of 197 industries tracked by IBD. The group soared to a record high Thursday and is up 11.7% since Feb. 3.

The sector has gotten a boost from the booming U.S. oil and gas industry, which has seen a sharp rise in production thanks to new drilling techniques used in shale formations such as the Permian Basin.

Crude-oil-by-rail has risen sharply in recent years. This in turn has driven demand for freight, hopper, intermodal, specialty and tank cars.

In addition to fuel, these cars also transport chemicals, "frac sand" and other products used in the production of oil and gas.

The railcar sector might be poised for even more growth if U.S. regulators decide to update the nation's fleet to make it safer.

In early January, Greenbrier CEO William Furman said about 80,000 tank cars don't meet current industry safety standards. He suggested that the cars be replaced or retrofitted.

"We believe a retrofit proposal, if adopted, can be completed in a reasonably expedited time frame and do not accept that there is not adequate capacity in the industry to do so," Furman said on a conference call with analysts.

His comments followed several crude oil train crashes, including those involving Canadian National Railway (CNI) in one incident and Berkshire Hathaway's (BRKA) BNSF Railway in another.

The Transportation Department's Pipeline and Hazardous Materials Safety Administration (PHMSA) is reportedly weighing new regulations based on petitions from the rail industry, shippers and recommendations from the National Transportation Safety Board.

While regulators and industry officials look into updating the nation's fleet of railcars, the industry itself keeps delivering solid results.

Trinity, which reported after Wednesday's close, logged Q4 earnings of $1.43 a share, up from 90 cents a year earlier and 2 cents above consensus views.

The 59% gain was Trinity's biggest of 2013 and marked the 13th straight quarter that earnings have risen by at least 27%.

The Dallas-based company's revenue rose 24% to $1.26 billion, the biggest gain since Q3 2013.

Top-line growth was driven by a 50% gain in its rail group, which makes cars used in the transport of everything from crude oil and renewable fuels to coal, grains, plastics, cement, specialty chemicals and steel products.

Trinity has worked to "realign a portion of our manufacturing capacity to serve customers for products in the oil, gas and chemical industries," CEO Timothy Wallace said in a statement.

Containing The Energy Boom

Trinity expanded its energy footprint in January when it bought the assets of WesMor Cryogenic, a supplier of cryogenic containers that store and transport liquid natural gas and other industrial gases.

"As a result of the energy renaissance occurring in North America, we are seeing increasing demand opportunities to provide cryogenic storage and transportation products serving the oil, gas, and chemical markets," Wallace said when the deal was announced.

Trinity guided Q1 earnings to $2.45 to $2.65 a share, well above the $2.05 expected by Thomson Reuters analysts.

"Given Trinity's high-margin backlog, the cash and earnings it is generating from its creative capital-raising transactions, and the potential for acquisitions into long-cycle energy and infrastructure end markets, we think it should exhibit substantial earnings power for the foreseeable future," Steve Barger, analyst at KeyBanc, noted in a report.

American Railcar, which makes and leases hopper/tank railcars and components, also reported Q4 results late Wednesday. Earnings of $1.14 a share were flat vs. a year earlier but easily beat the consensus estimate of $1.

Revenue fell 5% to $197.2 million, the first dip in years, but edged estimates for $196.9 million.

American Railcar benefited from "an unusually high percentage of tank car deliveries" in Q4, analyst Barger noted. He says it delivered 2,050 railcars, including 670 for its lease fleet. Barger had expected 1,700 deliveries.

American Railcar's manufacturing revenue came in at $170 million, easily topping estimates for $161 million.

"America Railcar's revenue beat relative to our model was primarily driven by the mix of third-party vs. lease cars produced in the quarter," Barger noted.

Wabtec early Wednesday reported Q4 earnings of 79 cents a share, up 18% from a year earlier and in line with views. Revenue rose 12% to $681.5 million, shy of estimates for $693.6 million.

While Wabtec expects "only modest growth in the global economy," ongoing investment in freight rail and passenger transit bodes well for the company and other firms in the sector, CEO Albert Neupaver said in a statement.