A few years ago, Warren Buffett bought a railroad and everything changed. Suddenly, it was if America discovered that it had thousands of miles of railroad and that a lot of transportation occurred on them, which meant lots of profit.
Railroad stocks have done very well since then, and like all sectors, that meant that there had to be what I call “infrastructure plays” out there. These are the companies that don’t immediately come to mind but are essential to the success of any given sector.
I thought, “Well, what travels on railroads? Trains? What are trains made of? Boxcars.” Ah-ha!
FreightCar America, Inc. (NASDAQ:RAIL) isn’t some fly-by-night entry in the railroad stocks sector. It’s been around since 1901. It is the largest manufacturer of aluminum rail cars in North America.
Why aluminum? Weight savings. Think about all the fuel that has to get expended to lug steel cars. Aluminum can yield more than 20 tons of additional payload compared to steel for the same price of fuel. They are also easier to take care of because they are less likely to rust.
All this leads to what businesses call “better operational efficiency” in railroad stocks.
The aluminum cars are used primarily to transport coal. However, it doesn’t just produce big bins. It has several different varieties of flat cars, as well as the more bad-ass heavy-duty cars that carry ore and other aggregates that you see on trains that seem to stretch for miles.
Add in a division that handles mega-cars to haul forest products, steel, wood chips and municipal waste, and you’ve got a full-service rail company. Obviously, they also offer service and replacement cars, and can refurbish them as well for resale.
So as Kevin O’Leary (aka Mr. Wonderful) always asks on Shark Tank, “That’s all very nice, but what are your sales?” Let’s take a look at this week’s earnings report and see where FreightCar America’s valuation falls.
Fourth-quarter revenues for RAIL were $212.5 million with net income of $4.8 million, or 39 cents per diluted share. That’s a huge improvement from last year’s revenues of $79.7 million and a net loss of $12.3 million, or $1.03 per diluted share.
For the full year, RAIL revenues were $598.5 million compared to $290.4 million in 2013. Net income for the year was $5.9 million, or 49 cents per diluted share, compared to a net loss of $19.3 million, or $1.61 per diluted share in 2013.
The 2013 troubles were the result of carrying costs on two facilities coupled with start-up costs at a new location, so they weren’t related to operations. Indeed, RAIL manufacturing is seeing robust growth, with 7,102 railcar deliveries in 2014 versus 3,821 units in 2013.
Let’s look at valuation and the balance sheet.
FreightCar America finished the year with $113.5 million in cash and $48 million in marketable securities for a total of $161.5 million. The surprise is that RAIL carries no long-term debt, because it takes a lot of money to produce these railcars. This isn’t a company that generates massive free cash flow, but it does OK, and enough that FreightCar America raised the dividend 50% — from 6 cents to 9 cents per share – for a yield of 1.3%.
RAIL anticipated 2015 earnings are pegged at $2.21, followed by a 20% increase to $2.66 in 2016. The kicker is that the cash adds up to $13.50 per share, and the stock only trades at $30, giving it an effective price of $16.50. It therefore trades at only 7.5x.
I think there are a lot of worse places to put money in the transportation sector.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
