2023-06-06 13:17:16 ET
Summary
- Greenbrier Companies' operating profit has decreased despite rising revenues due to increased costs.
- The dividend yield is 140 basis points lower than the current risk-free rate, making it a less attractive investment.
- I will continue to avoid Greenbrier shares until valuation drops or profitability improves significantly.
I recently took my lumps on the shares of The Greenbrier Companies, Inc. (GBX), and I described the experience in an article with the very original title "Taking My Lumps on Greenbrier." The shares are up about 5.4% since then, against a gain of 10.2% for the S&P 500, and I thought I'd review the name yet again to see if it makes sense to buy back in or not. I'll make that determination by looking at the most recent financial performance, as well as the relative valuation.
The fact that we're all busy people, combined with the fact that I want nothing more than to give you as pleasant a reading experience as possible, has prompted me to create the "thesis statement paragraph." This is for people who want a little bit more than what they get from bullet points and titles, but who may not feel up to the task of wading through an entire 1,360-word article by yours truly. You're welcome. Anyway, I'm going to continue to avoid these shares for now. The level of operating profit is down substantially compared to this time last year, in spite of massively rising revenues. Sales have gone up, but so have costs, and this has impacted operating profits. Additionally, the dividend yield is a full 140 basis points lower than the current risk-free rate. So, investors are taking on more risk, and getting less income for their trouble. This makes little sense to me. For this reason, I'm going to continue to avoid Greenbrier until the valuation drops further, and/or profitability improves massively.
Financial Snapshot
The most recent two quarters have been decent in some ways. Specifically, revenue for the first six months of FY 2023 are up by about 53.1%, driven by gains in manufacturing, which saw an uptick of 60%. Leasing rates are also up, as revenue on that front was higher by about 36%. In case you're worried that this comparison was a fluke driven by the fact that 2022 was a particularly soft year, fret no further. Sales for the most recent period were about 50% higher than they were in 2019.
The problem is that increases in sales are great, but investors are compensated by what's left after suppliers, landlords, and employees are paid. Additionally, the government needs to wet their beak. I mean, they need a taste. So, it's great that revenue has grown nicely, but so too have costs. For the most recent period, cost of revenue is up about 50.5% from the same time last year. Thankfully (and somewhat surprising to me if I'm being honest), input costs are only up about 49% from the pre-pandemic era. Either way, the result of all of this is that the net earnings to Greenbrier dropped off, and were down 30.5% from the year ago period.
Finally, I should point out that I'm somewhat concerned about the dividend at this point. The dividends haven't grown over the past year, and, given the current state of the world, that's understandable. Given that the dividend payment of $18.1 million represents about 110% of net income, and given that cash from operations was a negative $96.4 million, I'm not sanguine about the prospects of a dividend raise anytime soon. So, I'm willing to buy the shares if the valuation is reasonable, and if the dividend yield is attractive relative to risk-free alternatives.
The Stock
I always analyse the stock separately from the business because I consider them to be two very different things. The business generates revenue by selling, repairing, and leasing rolling stock. The stock, on the other hand, is a piece of virtual paper that represents a claim on some of the assets and cash flows of the business. The stock is often a poor proxy for what's going on with the underlying company. The stock gets tossed around based on the crowd's changing views about the demand for rail cars. Additionally, the company may come out with some great news, and the stock may spike in price, and then immediately fizzle .
This capricious behaviour is understandable when you consider that some big Wall Street firms seem to be sending mixed messages at the moment . Thus, the stock is in many ways a more volatile thing than the underlying business, and I think it behooves investors to treat them as separate entities.
In my experience, the only way to succeed in stock investing is to understand discrepancies between what the market "thinks" about a given company, and subsequent reality, and placing trades accordingly. If the news is good today, everyone knows it, and the shares are priced accordingly. If the news is bad, the same thing.
This relates to why I like to buy shares when they're cheap. There's a great deal of bad news already embedded in price, so it's much easier for the company to beat expectations. Additionally, there's less risk when you buy a cheap stock because it has less far to fall. You may lose more on a percentage basis, but you're out fewer dollars.
My readers know that I judge whether something's cheap or not in a few ways ranging from the simple to the more complex. On the simple side, I like to look at the ratio of current price to some measure of economic value like sales, earnings, and the like. I want to see a stock trading at a discount to both the overall market and its own history. When I last reviewed Greenbrier, I walked away because the PE had spiked to over 49 times, and the dividend yield of 3.8% was lower than the risk-free rate. Fast forward to the present, and here's the state of the world. The PE has dropped considerably, and is now sitting at "only" 24.7 times. The dividend yield, meanwhile, has barely budged since I last reviewed the name.
Although the company is not as egregiously expensive on a PE basis, it's still elevated in my view. This is the PE of a company that should be growing earnings, and in my view, that's not Greenbrier. So far, I'm not inclined to change my view.
In addition to simple ratios, I try to uncover the market assumptions I referenced above. In order to do this, I turn to books like "Accounting for Value" by Penman, and "Expectations Investing" by Mauboussin and Rappaport. Both of these books introduce the idea that stock price itself is a wealth of information that can tell you about current growth assumptions. The greater the assumptions about future growth, the more risky the investment. Thinking of the stock in this way gives us a different view on growth. Applying this way of thinking to Greenbrier at the moment suggests the market is assuming that this company will grow earnings at about 1% in perpetuity. This is a pretty pessimistic forecast, which I like a great deal. As you'll soon find out if you continue reading, I'm of the view that in the world of investing, everything is relative.
I'm sorry to have just spoiled the surprise, but I'm of the view that when it comes to investing, everything's relative. When we buy "X", we are, by definition, eschewing a host of "Ys." Additionally, we're always looking for the greatest risk adjusted returns. Given all of that, I want to "go on about" the fact that the dividend yield is currently about 144 basis points lower than the 1-year treasury bill . In other words, people who buy this stock are taking on more risk, and getting paid less. That's not my idea of prudent investing. Additionally, the stock is not cheap, and it's not obvious to me that earnings are on a sustainable upswing. For all of those reasons, I'm going to continue to avoid these shares.
For further details see:
Greenbrier Investors: Paying More, Getting Less