Friday, April 27, 2007

FreightCar America Inc. (RAIL)

FreightCar America Inc. is railcar manufacturer based in Chicago, IL. They specialize in coal-carrying railcars which represents most of their business (96% of their deliveries in 2006 and 93% of their deliveries in 2005). They also rebuild and resell used railcars and sell parts for railcars, but that represents a minuscule part of their business.


Railcar manufacturing is a very cyclical industry. It is very economic sensitive. It follows the economy and does excellent when the economy is doing excellent and does poorly when the economy is not doing so well. So far, a lot of the economic forecasters are forecasting a slowdown in the U.S. economy, just in the 1st quarter 2007, the economy grew at a 1.3% pace compared to a 1.8% pace as forecasted. That does not bode well for the short term. According to the Railway Supply Institute, orders, deliveries, and backlogs all fell in the 1st quarter 2007 compared to the 1st quarter 2006 and compared to 4th quarter 2006. The industry statistics are giving signs of a slowdown in industry as well.

The data below is from the Railway Supply Institute website.

Just in the past quarter, it was the lowest order total since 2003, backlogs went down almost 8% quarter over quarter. This is the biggest decrease in backlogs (in percent) since 2001.


This is the most attractive part of the company, they are trading at a trailing twelve month price/earnings ratio of 4.97. They pay a dividend of .24 a year for a yield of .5% at current price of $50 a share. Their balance sheet is very strong with debt almost non existent. Their cash and cash equivalents on hand is over $212 million and about $16.58 per diluted share. They are trading at a forward price/earnings ratio of 11.12 for year end 2007. 18.4% of their float is short.


Warren Buffett is bullish on the Railroad industry, he just upped his stake and became the number one shareholder of Burlington Northern Santa Fe. Just in January, the Board of Directors authorized a share buyback of up to $50 million, that's almost 8% of their shares outstanding at today's prices.


Their railcar backlog dipped from 20,729 to 9,315 from 12/31/2005 to 12/31/2006. There have been cost pressures in the raw materials they use to build their railcars like aluminum and steel. On the bright side, most of cost pressures in raw materials have been passed on to customers. Since railcars are usually ordered in bunches, a big portion of their yearly railcars are tied up into a small number of customers, so if someone cancels or delays there could be a negative effect any given year. FreightCar also relies heavily on one supplier, Amsted Industries Inc, for the purchase of wheels and other railcar components. Just as recently as in 2004 there was a shortage of wheels and that forced them to limit their deliveries.


FreightCar America has been in a trading range since around the summer of 2006 of between $45 and $60 a share. The three main moving averages are saying its in a bearish trend with the 50DMA below the 200DMA and the 20DMA is below the 50DMA. MACD and RSI showings are pretty neutral. If it does not go on to break strong resistance at $52.50, this could be the final leg up before it breaks support at $45. Volume has been picking up on negative days the past few weeks as well.


This does not seem like a great buy even though the valuation is superb. The economy has been slowing down and there are signs that the railcar manufacturing industry will follow. I don't know if this is exactly a shorting opportunity due to the extremely low valuation, but this does not seem like a long either. It doesn't look like there will be any growth in the near future so I think it's best to stay away from FreightCar America and come back in a few years when the economy is turning around.

Disclosure: I don't have a position in RAIL.

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