Is There a Railcar Stock Loaded With Value?

Railroad Oil Tank Cars
Source: Thinkstock
There are five U.S. companies that make railroad cars. The four independently traded makers have posted significant share price gains in the past two years, but the gains have not been equally distributed. Demand has been high for new tank cars to haul crude oil from fields in North Dakota and Montana to refineries on the east and west coasts, but only three of the four produce tank cars. Proposed new safety rules that could result in the scrapping of many tank cars currently being used is keeping interest high in the railcar companies.

Greenbrier Companies Inc. (NYSE: GBX) reported poor second fiscal quarter results on Thursday, blaming the weather and a changeover at its manufacturing plant in Portland, Ore. Greenbrier’s shares are up more than 130% over the past two years and closed yesterday at $45.90, down 1.4%. The shares have traded in a 52-week range of $20.26 to $48.69. The consensus price target on the stock from nine analysts is near $49 which implies a potential upside of 6.5%. The company’s forward P/E ratio is 14.34, and its price-to-sales ratio is just 0.71.

American Railcar Industries Inc. (NASDAQ: ARII), controlled by financier Carl Icahn, operates a leasing business as well as a railcar manufacturing business. Consolidated revenues were down in 2013 because the company focused on adding to its lease fleet and made fewer sales of its railcars. Shares closed Friday at $65.63, down 4.1%. The shares have had a 52-week range of $29.86 to $77.50.

With a consensus price target of $51 based on just four analyst calls, the stock could be overbought. American Railcar does not stand to make the same gains as Greenbrier if a massive replacement of old tank cars is ordered by regulators. Over the past two years, the company’s shares have jumped nearly 180%, but that’s sharply lower than the two-year peak of up 215% posted in early March.

FreightCar America Inc. (NASDAQ: RAIL) is up just 8.5% over the past two years mainly because its principal products are coal cars, intermodal cars and covered hoppers. There’s growth there, but not as much as in the tank car business. Shares closed Friday down 2.6% to $24.40 in a 52-week range of $16.53 to $27.09. Six analysts have a consensus price target of $24.67 on the stock. It, too, appears to be fully valued.

Trinity Industries Inc. (NYSE: TRN) has seen its stock price climb nearly 115% in the past two years. The company makes a variety of railcars, including tank cars, and the share price soared when Trinity reported fourth quarter results in mid-February. Shares closed at $70.36 Friday, down 2.5%. The 52-week range is $34.57 to $75.95. Eight analysts have placed a consensus price target of around $78.63 on the stock, implying a potential gain of 11.6%. The company’s forward P/E is 11.29, and the price-to-sales ratio is 1.28.

Union Tank Car Co., the fifth U.S. railcar maker, is controlled by Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A). Buffett-owned BNSF Railroad has said it plans to purchase 5,000 new tank cars to haul crude, but did not say if Union would be the supplier. BNSF currently transports about 500,000 barrels a day of crude oil representing about 10% of U.S. production in the lower 48 states. Berkshire Hathaway stock is up about 13% in the past 2 years.

Only Greenbrier and Trinity offer any upside at all. Of the two, Trinity looks much more promising. But Trinity is less focused on tank cars than Greenbrier, and that’s where the money is likely to be in the next few years. The impact on Union will be less noticeable to investors in Berkshire Hathaway, but the impact will definitely be positive. Buffett’s investments in crude oil producers are far more important to the company.