2023-11-09 23:47:39 ET
Summary
- Greenbrier Companies Inc. shares have fallen about 15.7% in the past four months, making it a potentially less risky investment.
- The latest financial results show that the company is less profitable now than it was seven years ago.
- The sustainability of the dividend is questionable, and the risk-free rate is higher than the dividend yield. It makes no sense to buy at current levels.
It's been just under four months since I suggested investors avoid Greenbrier Companies Inc. ( GBX ), and in that time the shares have fallen about 15.7% against a loss of about 2.8% for the S&P 500. While that's gratifying to my brittle ego, I think it's worth reviewing the name yet again, as I've obviously owned these shares in the past and I'd be willing to do so again at the right price. This is because a stock trading at $35.70 is obviously a less risky investment than the same stock when it's trading at $43. I'll determine whether or not now's a good time to buy back in by looking at the latest financial results, paying particular attention to the sustainability of the dividend. I want to compare that to the current valuation. Since we're in a world where everything's relative, I think it also makes sense to review alternatives in the context of risk free investments available to people at the moment. If investors can earn a superior risk adjusted return elsewhere, obviously that's relevant to the decision about whether or not to buy again.
I put a thesis statement very near the beginning of each of my articles because I know that my writing can be a bit labyrinthine, and I want to make your reading experience as pleasant as possible. So, in the thesis statement I give you my main points, so you can then decide whether it's worth your time to continue reading or not. This is just one of the many ways that I try to make your reading experience as pleasant as possible. You're welcome. I think the most recent financial results here were good compared to last year, but that's a low bar. The firm is less profitable now than it was 7 years ago. Additionally, I think there's a good chance that contractual obligations may eventually crowd out dividend growth. Writing of dividend growth, the firm would need to grow dividends at a CAGR of about 7% over the next decade for investors to simply match the cash returns offered by Treasury Notes. Additionally, Treasury Note holders have perfect visibility into their future returns, which can hardly be said of the holders of Greenbrier stock. Given that we're seeking "risk adjusted" returns, it makes no sense to buy this risky stock in my estimation.
Financial Snapshot
I think the current financial year was actually relatively strong, at least compared to last year. In particular, revenue and net income were up by 35.6%, and 33.25% respectively over FY 2022. Management rewarded shareholders with a 5.5% uptick in the dividend, which helped buoy the price. When we zoom out a bit, though, we note that the results aren't as solid this year as at first they appear. For instance, net earnings to Greenbrier were about 12% lower in 2023 than they were in 2019, suggesting that this company has yet to recover from the pandemic era. Because I'm very much a "glass half empty" kinda guy, I would also note that net earnings to Greenbrier are lower than they were in 2016 by about $274.7 million, meaning that earnings have declined about 81.5% over the past 7 years. This is hardly a growth company, so the valuation should reflect that in my estimation.
Since this isn't a growth company, I think it would be prudent to treat it as a so-called "cash cow." Based on that, I want to review the sustainability of the dividend here. I'm as much of a fan of accrual accounting as any reasonably sane person can be, but when it comes to looking at dividends, I like to focus on cash. Specifically, I compare the size and timing of contractual obligations to the size and timing of cash inflows. The higher inflows are relative to outflows, the more sustainable is the dividend in my view. I'll start by looking at the outflows.
I've plucked the following table from page 40 of the latest 10-K for your enjoyment and edification. We see from it that in the upcoming year the company is "on the hook", as the cool kids say, for $318.7 million of contractual obligations. The figure drops to $107.5 million in 2025 before spiking once again to $325.6 million of obligations in 2026. Finally, I would note that the years 2027 and 2028 are both "spicy meatballs" with contractual obligations of $486.5 million, and $411.6 million respectively.
Against these obligations, the company currently has about $281.7 million in cash. Additionally, over the past six years, the company has generated an average cash from operations of about $39 million. Also, please keep in mind because of the magic of cash accounting that over the same time period the company has been able to "add back" an average of $96 million per year because depreciation and amortization are not cash expenses. These may not be cash expenses, but I know from my long and troubled history with motorcycles that stuff wears out. Thus, it might be reasonable to conclude that the $39 million cash from operations might be an optimistic assessment, as it ignores the economic costs of wear and tear. Given all of the above, I don't consider the dividend to be very well covered at this point. I'd be willing to buy, but would need to see the stock trade for a significant discount, and would need the dividend yield to be significantly higher than the risk free rate.
Greenbrier Financials (Greenbrier investor relations)
The Stock
My regulars know that I like to buy shares when they are as cheap as possible. This is because cheaper shares offer a great combination of lower risk and higher return potential. Cheaper shares are lower risk because any bad news is already "priced in." This means that if a stock that the market is pessimistic about issues some new bit of bad news, no one pays much attention as the company has simply met expectations. In this case, the shares don't drop too much in price. If, on the other hand, the heretofore "dog" offers the good news that beats expectations in a positive way, there's what I call a "prodigal son" effect, which often drives the shares higher. I like "lower risk, higher return" potentials, so I want to buy shares when they're cheap.
Regulars also know that I measure "cheap" in a few ways ranging from the simple to the more complex. On the simple side, I look at ratios, and I like to see a stock trading at a discount to both its own history and the overall market.
When I last reviewed The Greenbrier, the shares were trading hands at a PE of about 25.25 times, and the dividend yield was sitting around 2.5%. Subsequent to the price drop, things are obviously better in some ways. Specifically, by these measures, the shares are about 23% cheaper, and the dividend yield is about 42% greater. Thus, this is not the poor investment it obviously represented earlier.
The question revolves around whether or not the shares are cheap enough. To answer this question, I feel compelled to remind investors that everything in the world of markets is relative. We're constantly seeking superior risk adjusted returns, and if we can get higher returns in an investment that presents lower risk, we go for it, or at least eschew the combination of lower returns, higher risk.
I measure everything against Treasury Notes because these represent the risk free rate. If an investment that comes with risk offers less than these, it is illogical to buy the risky investment. I feel somewhat embarrassed for needing to point this out, but given some of the comments I've received lately, I do feel the need. When I compare a stock to a Treasury, I ask the question "at what rate will the dividend need to grow in order for the stockholder to receive the same cash flows at the Treasury Note holder?". Note, I'm asking what is needed to match the risk free, but since stocks have risk associated with them, they should offer more than the risk free rate, but never mind.
I've answered that question in the case of Greenbrier, and I present my findings in a table and present it below for your ongoing reading pleasure.
Greenbrier Yield v 10 Year Treasury Note (author calculations)
It seems that in order to receive the same cash flows as investors in the risk free Treasury Note, this dividend will need to grow at a CAGR of about 7% over the next decade. That's an extraordinary assumption in my view, especially given the sizable contractual cash outflows in years 3, 4, and 5 as described above. It's also an extraordinarily "heavy lift" given that this company is actually less profitable now than it was 7 years ago.
Given the above, I'm going to continue to avoid these shares, because it's possible to earn higher returns that come with far less risk than these shares. If you can earn more in a "sleep at night" investment, why would you buy this?
For further details see:
Greenbrier Companies: Too Much Risk, Too Little Return