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Why Greenbrier Companies Shares Derailed and Lost 21.9% Value in March

Neha Chamaria, The Motley Fool

What happened

Just as investors hoped to see The Greenbrier Companies (NYSE: GBX) recover its losses from 2018 thanks to a strong start to 2019, they got a nasty shock in March, when the stock crashed 21.9%, according to data from S&P Global Market Intelligence.

Greenbrier shares jumped sharply on April 5 but gave up those gains soon after and are barely in the green so far this month. What's notable is that the reason behind the stock's slump in March and its wild swing on April 5 were related.

So what

Greenbrier shares took a hit on March 22, after the railcar and transportation equipment manufacturer reported shockingly weak preliminary numbers for its second quarter, and management said it was "reviewing its previous annual financial guidance." While the market knew what to expect from the company's earnings release on April 5, it seemed to expect a deeper cut to Greenbrier's full-year guidance, which is perhaps why the stock jumped in trading initially that day but soon cooled down.

Greenbrier's second quarter was a disaster, to say the least. Here are the key year-over-year highlights from the quarter:

  • Revenue grew 4.7% to $658.7 million.
  • Gross margin halved to 8.2%.
  • Net income dropped to only $2.8 million from $61.6 million in Q2 2018.
A wagon of freight train with containers.

Image source: Getty Images.

Greenbrier management pointed to three broad factors for the company's weak performance: "poor manufacturing efficiencies" in Europe, higher labor costs, and weather- and- facility closure- related challenges at its railcar repair operations. Long story short, productivity and cost inefficiencies at Greenbrier were largely to blame for its poor quarter. The market was, unsurprisingly, spooked.

On a positive note, though, Greenbrier's order flow and sales continued to trend higher. So Greenbrier received orders for 3,800 new railcars worth $450 million in Q2, which has pushed its total railcar backlog to 26,000 units worth nearly $2.7 billion as of Feb. 28.

As Greenbrier's current backlog covers nearly 95% of its production for fiscal 2019, management left its revenue forecast untouched: It expects revenue to exceed $3 billion this year, versus $2.5 billion in fiscal 2018. However, an exceptionally weak Q2 means Greenbrier now expects to earn only $3.60-$3.80 per share, versus its previous forecast EPS of $4.20-$4.40. Moreover, Greenbrier announced a 9% increase in dividends in Q2 2018 but has yet to offer investors any dividend increase so far this year. 

Now what

Investors shouldn't expect much on the earnings front this year, as Greenbrier's forecast translates into a 20% drop in EPS at the midpoint. What they should watch out for instead is the company's order trend. Greenbrier expects to deliver 24,000-26,000 rail cars this year, of which it delivered 9,600 cars in the first two quarters. Assuming it delivers 25,000 cars this year and maintains a similar pace of delivery thereafter, Greenbrier's current backlog could cover sales for just the first half of fiscal 2020.

In other words, the company should be able to attract enough orders in the coming months to keep its factories running and maintain its top line growth next year and beyond. That, and management's efficiency in resolving its ongoing productivity concerns, will decide where the stock is headed next.

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Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.