Long, extended bull markets – either on a broad basis, or even in an individual stock – generally tend to work against value-focused investors. That’s usually because once investors start to pile into stocks at good valuation levels, it doesn’t take long for prices to increase well beyond the point of useful value. I say usually because, of course, there are always exceptions to the rule, and sometimes, if a company’s fundamentals are strong enough – or have been improving along the way as its stock price also increased – that even a long bullish rally in a stock doesn’t automatically mean that there isn’t still a useful value to be seen.
Value investing tends to be a bit contrarian in nature, which generally means that the kind of long upward runs I’ve just described tend to make most value-oriented investors discard these stocks to focus on stocks at the opposite end of the price spectrum. If, however, the company’s business is still worth more than the stock’s current price, you get an interesting, if somewhat unusual convergence between value-based principles and the natural, growth-focused idea that stocks making new highs are more likely to keep making new highs.
As the world has worked to navigate its way through the ongoing pandemic – including a current, increasing surge in infections from the new Delta variant – it is interesting that a number of sectors in the economy have continued to do well. That includes the Transportation sector; as measured by the Transportation Average iShares ETF (IYT), the sector has grown by almost 50% over the past year year. One of the stocks that has exceeded even that impressive trend is Greenbriar Companies Inc. (GBX), which more than doubled in price from its starting point around the same time. The stock has tapered back since hitting a high in February at around $50, but might be finding a point to bounce off of support and begin going up again.
The question, of course is whether the value price for GBX still offers a useful value. Like many companies in its sector, GBX has dealt with significant challenges resulting from the ongoing pandemic, but unlike many of its small-cap brethren, has managed to maintain a healthy balance sheet along the way. The stock is also just a bit below its Book Value right now – a fact that automatically makes any value-oriented, long-term investor sit up and pay attention. In its simplest form, and as no less an expert than Warren Buffett likes to point out, Book Value is an expression of how much money a shareholder can expect to receive for a stock if the business were forced to shut its doors today. The fact that GBX is below that “worst case” price may in and of itself be an opportunity – provided, at least that the company’s fundamentals are strong enough to suggest that its current Book Value is stable, or even better, should be able to grow in the future. So let’s dive in and look at the numbers, so you can decide for yourself if GBX is a stock you should pay attention to right now.
Fundamental and Value Profile
The Greenbrier Companies, Inc. is a designer, manufacturer and marketer of railroad freight car equipment in North America and Europe; a manufacturer and marketer of marine barges in North America; a provider of wheel services, parts, leasing and other services to the railroad and related transportation industries in North America, and a provider of railcar repair, refurbishment and retrofitting services in North America through a joint venture partnership. It operates in four segments: Manufacturing; Wheels & Parts; Leasing & Services, and GBW Joint Venture. It also produces rail castings and tank heads through unconsolidated joint ventures. It operates an integrated business model in North America that combines freight car manufacturing, wheel services, repair, refurbishment, retrofitting, component parts, leasing and fleet management services. Its customers include railroads, leasing companies, financial institutions, shippers, carriers and transportation companies. GBX has a current market cap of about $1.4 billion.
Earnings and Sales Growth: Over the last twelve months, earnings dropped by -34.29%, while Revenues declined by almost -41%. In the last quarter, earnings strengthened 346.43%, while sales improved by about 52%. After struggling through just about all of 2020, the company’s margin profile is also showing signs of improvement; over the last twelve months, Net Income was a mere 0.04% of Revenues over the last twelve months, but improved to 4.39% in the last quarter. Margins in the Transportation sector tend to be pretty narrow anyway; but in an industry that is highly sensitive to commodity prices, that fact doesn’t give a small-cap company like GBX a lot of room to work with. Current inflationary pressure on commodity prices is a possible headwind that bears watching in the quarters ahead.
Free Cash Flow: GBX’s free cash flow reflects the impact of the past year’s struggles, sitting at just $2.18 million over the last twelve months and which translates to a Free Cash Flow Yield of just 0.15%. It also represents a massive decline from $333.7 million in the last quarter of 2020.
Dividend: GBX pays an annual dividend of $1.08 per share, which translates to an annual yield of 2.51% at the stock’s current price.
Debt to Equity: GBX has a debt/equity ratio of .58. This is a manageable number. Their balance sheet shows $602 million in cash and liquid assets against about $835 million in long-term debt. It also be noted that GBX’s liquidity has decreased since the end of 2020, when cash and liquid assets were $733 million.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at around $39 per share. That means the stock is overvalued at its current price, with about -9% downside from the stock’s current price. It also puts the stock’s bargain price at around $31.50 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line shown on the chart above traces the stock’s upward trend from its July 2020 low at around $25 per share to its February peak at around $50. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. From that point the stock has tapered into a gradual downward trend, but appears to have bounced off of support at the 38.2% retracement line, with current support sitting at around $42. Immediate resistance is right around $44.50 from a peak earlier this week. A push above $44.50 should have room to rally to around $48, while a drop below $42.50 could have about $2 of downside to next support at $40.50, where the 38.2% retracement line sits.
Near-term Keys: If you’re looking for a short-term bullish trading setup, a push above $44.50 could be a good signal to think about buying the stock or working with call options, using $48 as a useful short-term profit target. A drop below $42.50 could be a signal to consider shorting the stock or buying put options, but plan on taking quick profits at the 38.2% retracement line around $40.50. On a long-term basis, GBX remains a bit overvalued; the current downward trend would need to accelerate to push the stock to a more useful value-based entry point. I would also prefer to see improvement in the company’s Free Cash Flow as well as continued recovery in Net Income and strengthening liquidity before taking the stock as a useful long-term opportunity.