Greenbrier Shoots Higher on Strong Results, Big Railcar Order

By Dan Caplinger Markets Fool.com

Railcar manufacturer Greenbrier (NYSE: GBX) has been under pressure for years, as the company has had to deal with a down period in the railroad industry. Yet with prospects for infrastructure improvements and economic expansion having perked up lately, many have hoped that Greenbrier would be able to emerge from its short malaise. Coming into Wednesday's fiscal second-quarter financial report, Greenbrier investors wanted to see signs of recovery, and the company delivered with strong results and an encouragingly large order from a key partner.

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Let's look more closely at Greenbrier to see how it did and what's ahead for the company.

Image source: Greenbrier Companies.

Greenbrier bounces back to start 2017

Greenbrier's fiscal second-quarter results were a welcome change from the gloomy performance that investors have seen lately, although they still showed the difficulties that the industry has faced compared to better times last year. Sales were down 15%, to $566.3 million, but that was actually far better than the 22% decline that most investors had expected to see. Similarly, net income was down by about a quarter, to $34.5 million, but the resulting earnings of $1.09 per share easily topped the $0.84 per share consensus estimate among those following the stock.

A closer look at the report reveals that Greenbrier saw a big change in the relative contributions that its respective segments made to its overall success. After seeing big declines in revenue in past quarters, the key manufacturing segment held its own quite well during the period, seeing just a 2% drop from year-ago levels. The wheels and parts segment took a larger hit, but the nearly 9% decline was still better than the double-digit percentage decreases that Greenbrier had suffered in the past. However, the leasing and services segment took a huge hit, seeing sales drop by more than two-thirds and representing the vast majority of the revenue decline for the company as a whole.

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One area where Greenbrier showed dramatic progress was in its margin figures. The company cut its cost of revenue for all of its segments, and in the manufacturing unit that actually produced an increase in gross profit. Overall, gross margin climbed three percentage points to top 21%, and even though overhead expenses climbed slightly, Greenbrier did a good job of maintaining its profitability.

Operationally, however, the company faced some challenges. Railcar deliveries fell again, dropping by 100 units from the previous quarter, to just 3,900. Moreover, the company brought in diversified orders for just 700 new railcars during the quarter, with an estimated value of just $50 million. Greenbrier noted that it got orders for an additional 1,000 railcars after the end of the quarter, but backlog fell by 3,200, to 22,600 units, with estimated value of $2.44 billion -- down by more than half a billion dollars from where it was three months ago.

Greenbrier CEO William Furman kept his attention on the long run. "We are focused on our two-part strategy to protect and enhance core North American businesses during this time of market inconstancy," Furman said, "while we also expand internationally in targeted regions that offer promising growth opportunities for rail transportation." The CEO was particularly pleased with regulatory approvals for moves in Brazil and Europe to boost its business overseas.

Can Greenbrier keep climbing?

In particular, Greenbrier is happy about the expansion of a key relationship in Japan. After the earnings release, the railcar manufacturer announced that Tokyo-based MUL had agreed to expand its existing commercial relationship, with MUL expecting to grow its portfolio of railcars from 5,000 to 25,000 over the next four years. The memorandum of understanding between the two companies includes a multiyear purchase commitment for 6,000 new railcars from Greenbrier through 2020, and MUL agreed to an exclusive supply contract through 2023. In addition, supplemental actions through lease transactions and the use of used equipment will bring the value of the deal to more than $1 billion.

The long-term impacts of the MUL deal didn't change the guidance that Greenbrier gave for fiscal 2017. The company kept its projections for revenue of between $2 billion and $2.4 billion unchanged, and Greenbrier still sees earnings of $3.25 to $3.75 per share. Deliveries will contract to 14,000 to 16,000 units.

Nevertheless, Greenbrier shareholders were ecstatic about the results, and the stock climbed 12% in early-morning trading following the announcement. If the railcar company can keep moving forward, then a renewal of opportunity both domestically and internationally could bring fundamental success to Greenbrier in the months and years to come.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends The Greenbrier Companies. The Motley Fool has a disclosure policy.