Share tips: The new American railways boom

published 4 May 2012

Greenbrier (NYSE: GBX), rated a BUY by KeyBanc Capital

The $60bn American rail industry is on a roll and Greenbrier, its largest manufacturer of freight carriages for shipping goods, is the lucky beneficiary. Trains are around 75% cheaper for bulk deliveries than trucks, they're environmentally friendly and reduce congestion on highways.

The Federal Highway Administration estimates that cargo delivered by rail will climb 61% from 16.9 billion tons in 2010 to 27.1 billion tons by 2040. Between 1980 and 2010, $480bn was spent on tracks and rolling stock and this figure is bound to rise. Indeed, Greenbrier's revenues rose 60% to $458.2m for the three months to February.

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This growth spurt may slow in the near-term. William Furman, the chief executive, recently admitted he was seeing a slowdown in some exploration and production activities due to lower US natural gas prices. As drilling volumes are cut, demand for frack-sand-carrying carriages drops. "A lot of inventory has been ordered so I think there's just a natural pause as people recalibrate their demand."

Chief financial officer Mark Rittenbaum thinks deliveries for the second half of the year will also be affected as the product mix shifts towards automotive units that require more manual work and take longer to produce. Overall, the board still expects to ship 15,000 railcars this year.

Greenbrier (NYSE: GBX), rated a BUY by KeyBanc Capital

Wall Street is anticipating 2012 turnover and diluted earnings per share (EPS) of $1.8bn and $2.21 respectively, rising to $2.1bn and $2.77 in 2013. As a result the stock trades on an undemanding price/earnings (p/e) ratio of less than eight. I value the group on an earnings before interest, tax and amortisation (EBITA) multiple of 11. After adjusting for $487m in net borrowing, that delivers an intrinsic worth of $24 per share.

So what are the risks? Another recession would affect performance and British investors need to factor in foreign-exchange fluctuations. Ultra-low gas prices could also hit demand for coal transporters as power stations shift to the cheaper fuel. But Greenbrier isn't a major player in coal and should avoid the worst of any fallout.

In summary, the market seems to have panicked over the potential slowdown in one of Greenbrier's markets. I believe that has created a buying opportunity. Investment bank KeyBanc Capital has a target price of $29.

Rating: BUY at $17 (market capitalisation $570m)

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI or phone 020-7633 3634 for more.

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.