2023-07-12 12:35:05 ET
Summary
- Personally, I think The Greenbrier Companies' shares are overpriced, despite a 47% price increase, due to earnings being driven by an asset disposition.
- I also took note that the company's railcar backlog has declined by about $700 million from last year and the capital structure has deteriorated.
- After reviewing the financials and current valuation, I remain content with my investment in government bonds and believe Greenbrier shares are morbidly overpriced.
It’s been about five weeks since I announced that I’m continuing to avoid The Greenbrier Companies, Inc. ( GBX ) until profitability or valuation improved materially. The company has reported earnings since, and the market seems to like what it saw, because the shares are up about 47% against a gain of about 3.6% for the S&P 500. It’s time to review those earnings, and look at the valuation again to see if these shares represent better value at $43 than they did at $29.50. For those keeping track at home, I eschewed the shares and bought government bonds, and those are down about 7% since I bought them. That sounds bad, but I remain of the view that they’ll do well over time as rates inevitably come back down.
Welcome to the “thesis statement” portion of the article. This is where I give you the “gist” of my thinking, so you won’t have to wade through the entire article. I do this because I am absolutely obsessed with making the lives of my readers as pleasant as possible. You’re welcome. I think the market has made a mistake by bidding shares of GBX up to current levels. Earnings have been driven higher by an asset disposition, and I therefore don’t think current earnings are an accurate reflection of the ongoing cash generating capacity of this firm. Based on my adjustments to the financials, the shares are morbidly overpriced. Additionally, even if we assume the current very rosy financials reflect future cash flow generating capacity, the shares have limited upside from here in my view. The prospect of limited upside and massive downside isn’t attractive to me, so I’m going to continue to eschew these shares, and will remain content with my government bonds. I feel a need to point out that the purpose of my exercise was not to offer a precise figure for what the shares should be trading at. The purpose was to work out whether or not the shares are reasonably priced, slightly underpriced, massively underpriced, slightly overpriced, or morbidly overpriced. They are morbidly overpriced at the moment, and I'm less concerned about exactly by how much. Of less importance, but also noteworthy is the fact that the backlog has shrunk and the capital structure has deteriorated significantly over the past year.
Financial Snapshot
I’ll get some details out of the way before getting to the meat of the financial analysis. The frequently vaunted railcar backlog here has declined by about $700 million from last year to this, though is still higher than 2019’s figure by about $160 million. The trend is moving in the wrong direction, though, so I will be keeping an eye on this. Additionally, the capital structure has deteriorated from the same time last year. Specifically, cash on hand has declined by $128.3 million, and debt (consisting of revolving notes, and notes payable) has increased by $94.4 million. Total liabilities are up by about 11.5% from the year ago period.
Turning to the income statement now, the trend was not looking great way back in Q2 of this year. Although revenue was up fully 53% from Q2 2022, net earnings and cash from operations were down by 30.5% and 56% respectively. Fast forward three months, and the world looks very different. Revenue is up by $25.6 million from the year ago period. Although that’s not as robust a growth rate as it was from Q2 2022 to Q2 2023, it’s still very respectable. Cost of revenue is 41% higher in Q3 2023 than it was in the same period a year ago. What’s amazing is the fact that net earnings to Greenbrier exploded higher by 41% in Q3 2023 relative to Q3 2022. That’s quite a feat given that as of Q2, 2023, net earnings to Greenbrier were actually down 31%. I became curious about this seemingly miraculous turnaround.
I don’t want to be a “Debbie Downer” or anything, but it turns out that Q3’s results were driven higher by a $40.6 million “asset impairment, disposal, and exit costs” event. We give companies a “pass” when something bad happens if it’s a one-off. I think we should take the same attitude with elements that boost the bottom line. So, if we strip out this $40.6 million that dropped right to operating earnings, operating earnings jump by only $16.1 million, or 28.45% compared to the same period a year ago. Even so, that seems like a respectable uptick from 2022. The world turns a bit darker when we factor in the “interest and foreign exchange” expense. Last year, that figure was $39.3 million. This year it was $64 million. That’s a spicy meatball! So, if we strip out the (one time) $40.6 million, and keep all of the (presumably ongoing contractual obligations) interest expenses and FX effects, “earnings before income tax, and earnings from unconsolidated affiliates” actually drops by 49.7%. In the statements as written, this figure is up by just under 185%. I’ve summarized all of this in a table for your viewing pleasure below.
Adjustments to Q3 Income Statement (Greenbrier Q3 2023 10-Q)
So, in my view, the financials here are held aloft by a one-time positive event, and I think the market made a mistake by driving the shares higher. This alone makes me loathe to buy the shares at current prices, but because I’ve got a morbid curiosity about such things, I want to review the valuation.
Greenbrier Financials (Greenbrier investor relations)
It's Difficult to Make Predictions, Especially About the Future
I think the market’s driven the price higher on air, and that obviously creates risk. That written, anyone who’s followed my long history with this stock knows that I’m willing to buy it at the right price. I now want to try to quantify what I think the right price would be. In order to try to model this, I’m going to make the following assumptions. If you feel these are unjustified or unreasonable, feel free to input your own figures at home:
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Given my adjustments to the income statement, above, I think the first nine months of 2023 basically net out to zero. This is a function of income tax expense of $11.7 million, earnings from unconsolidated affiliates of $8.6 million, and the $8.5 million loss attributable to the non-controlling interest means.
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From 2014-2022, the fourth quarter represented a hefty percentage of the company’s profitability. Stripping out the pandemic year of 2020, the fourth quarter ranged from only 18.25% of annual profits in 2016 to fully 98% of profits in 2021. So, I’m going to call for (a very generous) $20 million of profits for the current year.
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I’m going to assume the number of shares will remain fixed at their current 30,883,231. I know that this is a stretch, given the ongoing buyback activity, but I need to reach for my ceteris paribus assumption to keep the math as simple as possible.
Using the arithmetical skills not so lovingly pounded into my incorrigible younger self by the good sisters at Holy Spirit School years ago, I have worked out that $15 million spread over 30,883,231 shares works out to EPS of about $0.64 for the current year.
Given that the market generally puts a 25 times PE multiple on trailing earnings per the following, I think the shares are currently about 60% overpriced.
Source: YCharts
I would be very happy to buy the shares at a reasonable price, and I think that reasonable price is somewhere around $20. Even more interesting from my point of view is that even if current earnings fully reflected the ongoing cash generating capacity of this enterprise, and even if we grant that the current Q4 will be typical and represent 36% of the whole year, that only gets us to $46 if we assume a typical PE here. Thus, even under the most optimistic circumstances, upside is limited by the fact that most of the positive news has already been “baked in.” I’m not generally a fan of limited upside and huge potential downside, and for that reason, I’m going to continue to eschew these shares. I remain very happy with my boring, predictable, and safe government bonds.
For further details see:
Greenbrier Stock Is Floating On Air