Isn’t it fascinating to see how quickly the mood of the market can shift? During the summer, and moving into fall of last year, it seemed like most of the talk and speculation I was seeing from experts and regular investors alike was extremely bullish. The market, and the economy had pushed through the ninth year of a historically unprecedented period of expansion and bullishness, and while that fact couldn’t be ignored, most seemed to use it as a launching point to predict that the good times would just keep rolling.
Fast forward to the end of the year, and the commentary had changed dramatically. Driven by trade discord, concern about increasing interest rates and a slowing global economy, it seemed like investors and pundits were all building a higher and higher “wall of worry” that pushed every major market average to near-bear market levels in a period of just about three months. Moving into the Christmas holiday, worry was certainly increasing that we were on the cusp of a new recession that could be just as unprecedented and painful as this latest bull market had been exhilarating and exciting.
We’ve just finished the first quarter of the year, and instead of continuing to drop below bear market levels, the market rebounded strongly through the first two and a half months of the year, moving to within about 5% of the all-time highs the major market indices set in September of 2018. From that point, the markets softened a bit at the end of the March, but as of now are still only slightly off of their mid-March peaks. Almost every stock in every sector seems to have followed that same pattern to one degree or another. That includes the Transportation sector; as measured by the Transportation Average iShares ETF (IYT), the sector is up about 13.5% for the year, despite dropping by about 1% in the last month. One of the stocks that has bucked that trend is Greenbriar Companies Inc. (GBX), which is down 50% from its October highs around $65 per share, and nearly 18.5% lower year to date.
In the never-ending quest to find value, GBX’s decline is interesting because the stock is significantly 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 is in and of itself 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 billion.
Earnings and Sales Growth: Over the last twelve months, earnings dropped by -40%, while Revenues increased by a little more than 8%. In the last quarter, earnings declined by -32.5%, while sales dropped -12.29%. The company’s margin profile is showing signs of deterioration; over the last twelve months, Net Income was 5.55% of Revenues over the last twelve months but was only 2.97% 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.
Free Cash Flow: GBX’s free cash flow over the last twelve months was -$17 million, and represents a decline since May of 2018 (the company’s mid-year earnings report) from about $270 million. This is a number that adds weight to the concern I just mentioned related to the company’s operating profile.
Dividend: GBX pays an annual dividend of $1.00 per share, which translates to an annual yield of 3.1% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for GBX is $43.25 and translates to a Price/Book ratio of .74 at the stock’s current price. The stock’s historical average Price/Book ratio is 1.58, suggesting the stock is nicely undervalued by more than 50%; at par with its average, the stock should be trading a little above $68 per share – a little above the stock’s all-time high. Even if you work only from the idea of seeing the stock move to par with its Book value, the opportunity is a little more than 25% on a long-term basis.
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 downward trend from a peak at around $65 per share. The stock is currently sitting right at its 52-week low around $32 per share, with near-term momentum moving very bearish right now. I expect the stock to see pretty significantly support between $29 to $32, based on previous pivot activity over the last couple of years; however a break below $29 should see the stock retest all-time lows at around $20. The stock would need to break above its last peak, reached in late February at around $44.50 (just a little above the stock’s current Book Value) to confirm an actual bullish trend reversal; however an early signal that the trend is starting to reverse could be seen with a break above $37.
Near-term Keys: If you’re looking for a short-term bullish trading setup, and you’re willing to be a bit aggressive, you could work with a break above $37 to buy the stock or start working with call options; however, the best signal would come from a push above $44.50. A push below $29 could be a signal to short the stock or consider buying put options with a target between $20 to $23. On a long-term basis, GBX has a terrific value proposition, even with just a move to par with its Book Value; however I do see the deterioration of Net Income, and negative Free Cash Flow as major negative marks – even more than any current bearish momentum the stock currently has. The company’s next earnings announcement is scheduled for this week; if that report provides an indication of improvement in those numbers, the stock’s current price could be an excellent opportunity to buy a good company at a very nice price.