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 – 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 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 U.S. has struggled to navigate its way through the ongoing pandemic, 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 more than 100% from a bear market low in March of last year. One of the stocks that has exceeded even that impressive trend is Greenbriar Companies Inc. (GBX), which has nearly tripled in price from its own bear market low around the same time.
One of the interesting thing about the stock’s performance is that despite the increase, GBX remains 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 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 $1.2 billion.
Earnings and Sales Growth: Over the last twelve months, earnings dropped by -200%, while Revenues declined by -47.6%. In the last quarter, earnings declined by -287.5%, while sales dropped nearly -37%. The company’s margin profile is also showing signs of deterioration; over the last twelve months, Net Income was a very narrow 1.29% of Revenues over the last twelve months, and weakened to -2.47% 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. The shift to negative territory is a clear reflection of some of the impact the company has been forced to absorb over the last year due to pandemic pressures.
Free Cash Flow: GBX’s free cash flow over the last twelve months is very healthy at nearly $333.7 million, which translates to an impressive Free Cash Flow Yield of nearly 28.5%. It also represents a steady improvement dating back to the beginning of 2020 from -$45.31 million that offers an interesting counterpoint to the negative Net Income and earnings pattern I just described.
Dividend: GBX pays an annual dividend of $1.08 per share, which translates to an annual yield of 3.02% at the stock’s current price.
Debt to Equity: GBX has a debt/equity ratio of .55. This is a manageable number. Their balance sheet shows $733 million in cash and liquid assets against about $797 million in long-term debt. It is also worth noting that GBX’s liquidity has increased since the beginning of 2020, when cash and liquid assets were $178.47 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 $41 per share. That means the stock is modestly undervalued, with about 14% upside from the stock’s current price. It also puts the stock’s bargain price at around $33 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 April 2020 low at around $13 per share to a recent peak in late December at nearly $38. The stock has retraced somewhat from that point, with immediate support sitting at around $34 per share based on pivot activity in December and earlier this month. Resistance is at $38. A push above $38 should see next resistance at around $40 based on the most recent resistance break in December, which saw the stock move above $36 and then peak at $38. A drop below support at $34 should find next support at around $32 based on a couple of pivots around that level; but if bearish momentum accelerates, it could drop to $30 before finding new support at all.
Near-term Keys: If you’re looking for a short-term bullish trading setup, a pivot low anywhere between the stock’s current price and support around $34 could offer a signal to buy the stock or work with call options, using the stock’s December peak at around $38 as a useful profit target. A push below $34 could be a signal to short the stock or consider buying put options with a target between $32 to $30. On a long-term basis, GBX has a useful, but not quite compelling value proposition; however I do see the deterioration of Net Income as a major red flag in this case, despite the company’s favorable Free Cash Flow and healthy liquidity. An improvement in Net Income in the next quarter would provide better confirmation of the company’s fundamental strength and be more likely to make the stock a useful long-term opportunity.