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Are Railcar Stocks Headed for a Turnaround?

Zacks Equity Research

According to a Railway Age report, Economic Planning Associates (EPA) has raised expectations pertaining to total railcar deliveries to 43,000 cars (earlier 41,000 cars) based on market analysis.

Railcar deliveries are expected to increase further to 46,300 and 53,500 in 2019 and 2021, respectively. The report further stated that declining rail car demand in 2016 resulted in a 66% decline in backlog during the course of the year to 66,700 units.

Greenbrier’s Strong Results Raise Optimism

The impressive performance of railcar manufacturer The Greenbrier Companies, Inc. GBX in the second quarter of fiscal 2017 (ended Feb 28), raised hope pertaining to an improved rail car demand scenario. Shares of this Zacks Rank # 3 (Hold), Oregon-based company, were positively impacted following its better-than-expected results on Apr 5. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company delivered 3,900 railcars in the quarter with a backlog of 22, 600 units at the end. Moving ahead, railcar deliveries are expected in the range of 14,000 to 16,000 units for fiscal 2017. We believe that the improved scenario pertaining to rail traffic is a positive.

Partnership Expansion: Boost to Railcar Operations?

Apart from its strong earnings report, the stock of this railcar manufacturer was boosted by the expansion of the partnership (in North America) with Tokyo-based Mitsubishi UFJ Lease & Finance (MUL), worth more than $1 billion. The Japanese company aims to increase its railcar portfolio from the current level of 5,000 to 25,000 railcars over the next four years.

Per the Memorandum of Understanding, MUL has a multi-year commitment to purchase 6,000 newly-manufactured railcars through 2020 from Greenbrier. Also, MUL is expected to obtain its newly-manufactured railcars exclusively from Greenbrier through 2023.  Consequently, the huge railcar order has sparked optimism among investors.

We remind investors that in late 2014, Trinity Industries TRN, which produces and sells a wide range of products including railcars and railcar parts, inked a 4-year deal to deliver 8,950 cars to GATX Corporation GATX. The delivery of railcars started last year. GATX Corp. leases out railcars.

Price Performance

We note that companies like Greenbrier, American Railcar Industries, Inc. ARII and GATX Corp.  have been good performers of late. The railcar manufacturers have outperformed the Zacks categorized Transportation - Equipment & Leasing industry over the last month. Shares of Greenbrier, American Railcar Industries and GATX Corp. increased 12.5%, 2.9% and 5% respectively, while the industry fell 1.5%.  

 

Oil Prices Still Low

Automotive railcar demand is tied to low fuel prices apart from improved economic health. Despite the recent optimism surrounding the oil price following last year's OPEC deal,  it is still hovering around $50 a barrel. This is much lower than the $100+ per barrel witnessed in mid-2014. The fact that the oil prices are unlikely to touch those highs any time soon, seems to be a positive for automotive railcar demand.

We believe, the steadily improving economy should also buoy railcar demand. Meanwhile, demand for railcars has diversified to sectors beyond oil. This was due to increasing shipments of chemicals, grain, autos and construction materials. As a result, many railroads have increased the number of railcars and locomotives in order to decrease track congestion.

In the event of railcar demand really picking up, shares of the above mentioned railcar manufacturers are likely to get a further boost. Consequently, we expect investor focus to remain on this burning issue.

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Trinity Industries, Inc. (TRN): Free Stock Analysis Report
 
Greenbrier Companies, Inc. (The) (GBX): Free Stock Analysis Report
 
American Railcar Industries, Inc. (ARII): Free Stock Analysis Report
 
GATX Corporation (GATX): Free Stock Analysis Report
 
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