Stop Your Portfolio From Going off the Rails
Investing in rail companies is a double-edged sword. On the one hand, you get the benefit of investing in the rebound of the world economy. On the other hand, you have to find the right operator to invest in. With so much geographic specialization, it can be hard to pick the company best poised for growth. Instead of investing in one location, check out the companies that support the operators. They're like the Neapolitan ice cream of railway investments.
These companies make the cars, wheels, brakes, and other pieces that keep the railroads running. Companies like Greenbrier (NYS: GBX) also finance and maintain fleets of cars. As the sector grows, so do sales. Since they support companies across the country and around the world, you also get geographic diversity in your investment.
The railroad ties that bind
Two of the biggest railroads in North America have shown stellar growth in the past year. Union Pacific (NYS: UNP) grew revenue by 15% in 2011 and net income by 18%. Canadian National (NYS: CNI) was in the same ballpark, growing net income by 17%. Both companies have attributed the growth to higher freight volumes driven by a gradual improvement in the North American economy.
For railcar and railcar component manufacturers, this economic improvement is coupled with a surge in natural-gas interest and production. Rail analyst Steve Barger has been quoted as saying, "If you want a car, you're going to pay a higher price for it right now simply because there are no available build spots left." It sounds like the railcar manufacturer gravy train is pulling into the station.
Choo-choo-choose a great stock
Westinghouse Air Brake (NYS: WAB) makes (spoiler alert) air brakes for railcars and sells them in the U.S., Germany, Australia, and Mexico, to name a few locations. Its long-term vision is to one day live in a world where buses no longer fear railroad crossings. Altruism aside, the company also posts solid fundamentals.
Over the past few years, Westinghouse has benefited from a piece of rail safety legislation passed in 2008. In it, the U.S. government mandated that some trains be outfitted with special technology in order to cut down on accidents. These "positive train control" installations accounted for over 6% of the company's revenue in 2011. The deadline for installation is 2015, so expect sales to continue as procrastinating companies finally make purchases.
Along with legislation-driven revenue, Westinghouse has generated overseas revenue by making some targeted acquisitions and closing big deals. Total international sales grew 32% in 2011 and made up 46% of total revenue. Again, the beauty for investors is the wide range of exposure offered through the stock; you get to invest in the sector as a whole and in both domestic and international rail.
No passport required
If the Greek debt crisis, war-torn countries, and shifting dictators hold no interest for you, keep it local with Trinity Industries (NYS: TRN) . Last year, Trinity made about 30% of the railcars shipped in North America. In addition to making the things, it leases almost 70,000 cars through two management firms. At the end of last year, over 99% of those cars were being utilized. So yes, Trinity is doing well.
The company has a strong pipeline of work, as well. At the end of last year, it had about 29,000 cars in its backlog. This was a huge jump from 2010, and a big chunk was due to a new agreement with GATX to provide 12,500 railcars over the next five years. Trinity plans to get through 55% of the total backlog by the end of 2012.
Bringing it back to where we started, let's finish off with a deeper look at Greenbrier. Of the three companies covered here, Greenbrier is the smallest, with a market cap of only $538 million.
Between 2008 and 2010 Greenbrier got hammered by the weak freight market. By 2010, sales had dropped 43% from their 2008 levels, and the backlog of orders shrank from 16,200 in 2008 to 5,300 in 2010. The stock price took an even bigger beating, falling from a high of over $27 in February, 2008 to under $2 in March, 2009. But things have turned a corner, and the profit train is coming round the bend.
In its last quarterly filing, Greenbrier recorded a 100% increase in sales year over year. This increase resulted in a massive movement on the bottom line, with earnings per share rising from -$0.11 to $0.57. This increase came on the back of renewed interest in domestic oil and natural-gas production, which has shown no signs of abating.
If there's anything worth looking out for in the short term, it's cash management. The company has spent a lot recently, and its overall cash on hand has fallen drastically. In its most recent release, Greenbrier reports cash on hand to be more than 50% lower than at the same time in 2010.
Overall, all three companies provide good inroads to the rail industry without forcing investors to choose a specific rail provider. Trinity provides a foothold in the American market, Greenbrier represents an opportunity to invest in a company on the rebound, and Westinghouse gives the best international exposure.
Luckily for investors, Westinghouse is far from the only American company looking abroad to drive growth. There are three other companies whose international growth stories we're particularly bullish on. If the trend continues, investors could be looking at internationally fueled new stock highs. Uncover them in our special free report: "3 American Companies Set to Dominate the World." The report won't be available forever, so we invite you to enjoy a free copy today. You can access it by clicking here. Enjoy, and Fool on!
At the time this article was published Fool contributorAndrew Marderhas no stake in any of the stocks mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.