Time to Work on the Railroad With These 3 Stocks
Editor's note: A previous version of this article misidentified the rail line on which a fatal accident occurred last July. The Fool regrets the error.
The railcar industry has been in the spotlight in 2013. Transportation of crude oil and other liquids continues to increase, as rail becomes an alternative to pipelines for petroleum producers. However, two major rail accidents in 2013 have also put pressure on the industry and may lead to potential changes -- and the possibility of new and improved railcars. Here is a look at three companies that may benefit from railroads' shifting landscape.
How the Industry Changed
Back in July, a horrible accident on the Montreal, Maine & Atlantic line killed 47 people, as 72 tankers of spilled crude oil caused Canada's worst rail accident in the last century. And dozens of railcars went up in flames in a Genesee & Wyoming accident in Alabama several weeks ago, though no one was hurt or killed.
Railcars now transport 800,000 barrels of oil per day, and the aforementioned accidents have caused industry leaders to question the safety of railcars.. In response, the railroad industry is asking the U.S. government for new regulations that would oblige train companies to upgrade their existing railcars via repairs or new purchases such as puncture-resistant railcars, which provide a thicker shell and are less likely to leak out hazardous materials while traveling along the rails.
And with those new rules come a potential cash windfall for the following three companies.
American Railcar is a Winner
American Railcar Industries is one of the biggest providers of railcars. The company booked a record fiscal year last year, with revenue of $711.7 million. Earnings per share also hit a record of $2.99, easily beating analysts' estimates of $2.69.
In the most recent third quarter, American Railcar posted revenue of $198.9 million, which beat analysts' estimates by an amazing $21.5 million. The company saw huge double-digit improvements in all segments. Manufacturing revenue increased 11% to $205.8 million. The company's lease segment increased 95% to $8.3 million. Railcar services increased 16% to $19.7 million.
In the quarter, American Railcar shipped 1,640 railcars, including 280 that it will lease to third parties. The new leased cars gave the company a total of 3,780 railcars that are leased or will be leased out soon. This is a huge improvement over the 2,190 in the prior year's comparative period.
American Railcar has seen an increase in its backlog to the number of tanker cars ordered. Many of the cars purchased have been the new puncture-resistant cars. This is good news for investors, as tankers come with higher margins than the normal hopper cars.
Last fiscal year, American Railcar shipped 7,800 railcars. The company now has a backlog of 6,300 railcars and continues to see demand for its product. Chevron placed a multi-year order for 2,750 plastic-pellet-covered hopper railcars from 2014 to 2016.
Trinity Diversified, But Rail is King
Another way to play the potential of upgraded railcars is Trinity Industries . This $4 billion company manufactures railcars and also competes in other businesses involving energy and construction. The company is seeing strong demand for its product and recently boosted its full-year earnings-per-share guidance as a result.
In the third quarter, earnings per share increased 58% to $1.26. As a result, Trinity now expects full year earnings to hit a range of $4.55 to $4.65 per share. Revenue increased 22% to $1.1 billion. The company received orders for 5,610 railcars in the quarter, and now has backlog of 40,050 units, representing an astonishing $5.1 billion. The company railcar unit remain's Trinity's biggest business segment, with revenue of $718.5 million in the quarter, an increase of 57%.
In the third quarter, Trinity's other business segments all represented less than $200 million. Railcars are the bread and butter for this company, and investors could win as a result. With a huge backlog worth more than the current value of the stock, the risk-reward ratio seems right. And with other industries like barges, energy equipment, and construction products in its stable of offerings, Trinity also offers a slight cushion against a downtrend in the railcar industry.
Trinity is also a big play on the potential of replacing old railcars. The company has more than 11,500 DOT-111 tank cars. These railcars, which are being targeted by railroad regulators, may all have to be replaced. While Trinity's leasing division may be hurt by losing a large amount of its current tank cars, the company could make up for it by selling more high-margin new-and-improved tank cars to customers.
Greenbrier Small, but Could Be Acquired
One of the smaller plays on the railcar industry is Greenbrier Corporation . The small $800 million company was previously targeted by American Railcar, which wanted to form a huge company through a potential merger. But Greenbrier is doing just fine on its own, as it boosts its backlog and revenue.
In the fiscal 2013 year, the company ended with a backlog of 14,400 units worth $1.5 billion. In the fourth quarter, Greenbrier delivered 3,500 units and took in orders for an additional 3,400 railcars. The company recently issued strong guidance for fiscal 2014. Greenbrier believes its revenue will top $2 billion in 2014, an improvement from the $1.76 billion posted in 2013.
The company also believes earnings per share will come in between $2.45 and $2.70, up from the $2.00 posted in fiscal 2013. Unlike Trinity and American Railcar, which are shifting to leasing railcars, Greenbrier gets a relatively small portion of revenue -- $0.07 billion last year -- from its leasing segment.
If regulators don't require replacing all tank cars, and instead insist on fixing existing ones, Greenbrier may benefit most. The company has several large rail maintenance deals, including a new one signed with CIT Rail. Greenbrier also gets a small portion of its revenue from its parts division, which could see a nice boost in sales over tank car fixes.
Time to Buy Railroads?
The recent rail disasters are unfortunate events that have claimed lives. Since oil needs to get from one place to another, railroads need to ensure that flammable products travel more safely. These three companies can not only improve the industry, but also make investors money along the way. Regulators will push train companies to upgrade existing fleets. New technology from these companies has created safer, thicker railcars that will likely please regulators.
The DOT-111 tank cars in question were required to be made safer back in October of 2011. Since that time, these three companies have seen their backlogs increase as the rail industry continues to boom and train companies focus on safer cars.
My favorite pick is American Railcar Industries, as the company has strong backing from Carl Icahn and continues to improve its leasing sector. Both Greenbrier and Trinity are also great plays for investors as well.
The article Time to Work on the Railroad With These 3 Stocks originally appeared on Fool.com.
Chris Katje has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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