2023-09-28 10:20:30 ET
Summary
- The stock market has been negatively impacted by rising Treasury yields, higher oil prices, negative consumer sentiment, and credit card charge-offs.
- The Greenbrier Companies, Inc. is a railroad freight car equipment manufacturer with a strong backlog and improving gross margin profile.
- GBX's Q4 FY 2023 new order book is robust, indicating potential for higher earnings in FY 2024. Consensus estimates for FY 2024 EPS appear to be too low.
With the 10YR U.S. Treasury ( IEF ) eclipsing 4.5% and quickly approaching 4.6%, the stock market has been out of sorts, to put it mildly. If you're long stocks, generally speaking, August 2023 was really bad and September 2023 has been worse, although there are still two trading days left in the month. Throw in higher oil prices, driven by the Saudi's and OPEC ( USO ) holding back production, as the U.S. already played the releasing barrels onto the market game, via the Strategic Petroleum Reserve releases, and another worry is added to the checklist of worries. Then we could talk about how negative consumer sentiment has moved or how credit card charge-offs have been rising, perhaps signaling some pockets of balance sheet deterioration.
And when the sentiment swings this negative, suddenly the growing list of worries seems to be more urgent and apparent. And if this wasn't enough, the media, with its 2023 megaphone, loves to amplify these and many other worries, as let's face it, bad news and fear travels faster than good news. Lastly, as I'm not a macro strategy or investor, I would venture to guess hedge funds, collectively that is, are actively and aggressively long oil and shorting treasuries and increasingly shorting stocks. That said, that is beyond the scope of today's article. I simply wanted to establish that all of these negatives can create opportunities, under the surface, as market participants can easily get too distracted by fear. In this fight or flight mindset, long opportunities, perhaps hiding in plain sight, can get overlooked.
To that end, I write to share a compelling idea that is hiding in plain sight. The idea is The Greenbrier Companies, Inc. ( GBX ).
The Company
Per its 10-K,
The Greenbrier Companies, Inc. is one of the leading designers, manufacturers and marketers of railroad freight car equipment in North America, Europe, South America and other geographies.
The operate an integrated business model in North America that combines freight car manufacturing, wheel services, railcar maintenance, component parts, leasing and fleet management services. Our model is designed to provide customers with a comprehensive set of freight car solutions by utilizing our substantial engineering, mechanical and technical capabilities as well as our experienced commercial personnel.
The company operates and has three reportable segments: Manufacturing; Maintenance Services; and Leasing & Management Services.
The Catalyst And Opportunity
Remarkably, now that the company pre-announced and revealed its robust Q4 FY 2023 new order book (its fiscal year ends August 31), we know GBX has its best entering backlog since 2015. In fact, I was so impressed by the resurgence in its new order book in Q4 FY 2023, and throughout FY 2023 for that matter, this prompted me to invest the required four hours (or so) to go back in time and dig through GBX's 10-Ks and 10-Qs and input key data into excel (by hand) to understand both magnitude and trajectory and to more readily see how EPS moves, for a GBX, in FY 2024, via a simple pro-forma FY 2024 EPS model.
As you can see below, last week, GBX revealed 15,300 of new railcar orders, during the Q4 FY 2023 quarter. That is exceptional and arguably Mr. Market was asleep at the wheel, too distracted by broader market weakness and fear to even notice.
See here:
Seeking Alpha
Going Back And Modeling Historical Results (and Modeling Pro-Forma FY 2024 EPS)
Enclosed below is my history-based model of Greenbrier, going all the way back to FY 2013. All the data was taken from GBX's 10-Ks and 10-Qs. Further, using what I believe to be somewhat conservative assumptions, I created a back of the envelope EPS model, for FY 2024. Again, I don't think any of my assumptions are demanding given the nicely improving gross margin profile exhibited by GBX, of late, coupled with how strong its entering FY 2024 backlog positions the company.
Here are a few key takeaways. A robust and high quality backlog drives this business. When you have a high quality backlog, you can be more margin selective in accepting new orders, and at more favorable terms. Moreover, when your manufacturing operations are running at a very high capacity utilization rates, you get better economies of scale.
Assuming GBX hits its Q4 FY 2023 guidance, which at the mid-point, would equate to Q4 deliveries of 6,500 units, because of the robust Q4 FY 2023 order book, GBX should have a starting (or entering) backlog, for FY 2024, of approximately 32,200 units. This is the highest entering backlog since FY 2015.
Positive Qualitative Data Points (from GBX's Q3 FY 2023 Conference Call, June 29, 2023)
1) Supply Chain Is Getting Much Better
Qualitatively and in case anyone is actually paying attention, per its Q3 FY 2023 conference call, GBX's management stated its persistent and long lasting supply chain issues, are now largely behind them.
Gross margins of manufacturing of 9.6% increased 260 basis points compared with the prior quarter. And some of the efficiencies we discussed during the investor day materialized more quickly than expected. And while there will be unforeseen issues that occurred during some quarters, we're confident that many of the efficiencies achieved thus far will continue. In particular, supply chain issues that have been a recent headwinds seem to be largely in the rearview mirror. And as we've discussed previously, we're bringing fabrication in-house for basic primary parts and sub-assemblies, as part of our make versus buy strategy.
The first phase of this work will be completed in the fourth quarter that we're in today. And we expect to achieve our full cost savings targets of $50 million to $55 million in fiscal 2025.
(Source: GBX Q3 FY 2023 Conference Call - June 29, 2023, Emphasis added by author)
2) GBX's gross margin profile has been improving faster than the street realized. And we can't lose sight of management's North Star of returning to sustainable mid-teens gross margins, with a FY 2026 target date.
And while revenue dipped slightly compared with the prior quarter aggregate gross margin improved by 190 basis points to 12.3%. Increasing our aggregate gross margin to the mid-teens by fiscal 2026 is one of the targets we provided during the investor day. And we're pleased to report the progress on that front.
(Source: GBX Q3 FY 2023 Conference Call - June 29, 2023)
3) On the Q3 FY 2023 conference call, management pointed to pent up replacement demand and ongoing supply tightness.
Despite weakness in freight volumes, the railcar demand environment remains stable due to pent up replacement demand and tight supply. And we continue to see healthy railcar inquiries and orders for a variety of rail car types. We are pleased with the performance of leasing and management services in the quarter. Our lease rates on renewals are increasing by double digits and we are extending lease terms while maintaining a high fleet utilization of nearly 99%.
(Source: GBX Q3 FY 2023 Conference Call - June 29, 2023)
Sell-Side Consensus Estimates Appear Too Low
Therefore, if you take a peek at my pro-forma and back of the envelope model, in the far right section of the model, based on reasonable assumptions, I'm arriving at around $4.02 in FY 2024 EPS.
And if you look at consensus estimates, for FY 2024, somehow the street (sell side analysts) is only modeling $3.61 in FY 2024 EPS. Even stranger, they are modeling FY 2024 revenue to be down sequentially to FY 2023.
Putting It All Together
To make a long story short, GBX has a very good management team. We aren't at the peak of the cycle, and because of its robust FY 2024 backlog, combined with an improving gross margin trajectory, I would argue FY 2024 consensus EPS estimates are too low. I'm a happy buyer of GBX shares at $41 (or better).
For further details see:
The Greenbrier Companies, Inc.: FY 2024 Consensus Estimates Look Too Low