|Shares Out. (in M):||20||P/E||8.7x||14.6|
|Market Cap (in $M):||875||P/FCF||0||0|
|Net Debt (in $M):||480||EBIT||0||0|
|Borrow Cost:||Available 0-15% cost|
1) Timing / uncertainty on 4Q’s book to bill
2) Anything / everything discussed in this write up reverses course. Demand rebounds or is generated from a new source, orders rebound. Retrofit activity increases.
Disclaimer: The views and opinions stated are the personal views of the author and are not the opinions of the author’s employer. Do not rely on the information set forth in this write-up as the basis upon which you make an investment decision - please do your own work. The author and his family, friends, employer and/or funds in which he is invested may hold positions in and/or trade, from time to time, any of the securities mentioned in this write-up. This write-up does not purport to be complete on the topics addressed, and the author takes no responsibility to update this write-up in the future.
Disappointing backlog and lower future earnings.
|Subject||Agree, but . . .|
|Entry||02/02/2016 10:23 PM|
We are short and think floor is going to fall out in the next quarter or two, but we have been surprised by the strong results thru Q3. So devil's advocate question: Why didn't the short thesis already show more clearly in Q2 and Q3 results?
We have been surprised by the strength of these results and do not have a good answer as we thought the elements of the thesis would have already shown themselves.
|Subject||Re: Agree, but . . .|
|Entry||02/03/2016 09:37 AM|
Thanks straw, glad we are on the same side.
Quarterly results have been strong for all the manufacturers (TRN, GBX, ARII). They have all reported record manufacturing earnings and increasing guidance for 2015. This is because the cars being delivered are high margin cars booked during the boom times. These companies had 6-8+ quarters of deliveries on the books, with locked in returns, before things went south. As we roll through 2016, deliveries will be lower-margin cars booked during 2015 and margins should start to contract. [this is all stuff you likely know already]
But its all about the future, and ARII's stronger than industry book to bill in 3Q was likely a function of 1) some makeup from weak 2Q orders, and 2) ARII wins in arguably its best product category, larger covered hoppers, which is one of the few areas of remaining demand. Apparently GBX isn't that strong with large covered hoppers, and with TRN firing on all delivery cylinders and having little production capacity, this left ARII well positioned to scoop up some covered hopper orders since they had the capacity. With deferrals and/or cancellations happening to TRN, I hear TRN can now be more accommodating for these cars and won one of the bigger covered hopper orders of the last few months.
Lastly, we suspect that TRN and GBX were the more aggressive actors with regards to bookings and possibly leasing and that ARII might have been a little more cautious, which could be evident by their shorter backlog. Only time will tell, but this is pretty much immaterial to the thesis. The fact is, demand has fallen off substantially, ARII's short backlog likely represents lower margin orders, competitors now have capacity to compete for all new orders, and ARII faces a large earnings cliff.
Did you see the recent news from CIT group? They predict their rail leasing utilization will fall from 96% to 90% in 2016 and for rental rates to decline due to weakness in oil, coal and steel. ARII is currently over-earning with its lease fleet (leases were also signed during the boom) and these railcars are at risk of going idle as leases expire. These were put on the books at FMV at the time and could be at risk of significant impairment in the future. Unfortunately that's likely more of a 2018 story, but helps add conviction to the inevitability of much lower earnings.
Also, RBN Energy’s updated on crude by rail: https://rbnenergy.com/slow-train-coming-crude-by-rail-decline-picks-up-pace“At the height of the CBR boom – shippers paid upwards of $2,500/month to lease scarce rail tank cars. Now lease rates have dropped to $300/month in some cases (according to Genscape) amid a glut of tank cars. Some shippers who purchased more tank cars than they need now are paying $30/day to park them on unused sidings.”
|Subject||Re: ARII - For the record...|
|Entry||02/19/2016 09:17 AM|
Ha, tranquillo Mojoris, tranquillo.
To reiterate: “ARII faces a massive earnings cliff in late 2016 or early 2017, possibly sooner”
Yes, it was a fine quarter. Beat was driven by higher mix of direct vs lease cars. Backlog progression clearly suggests those cars were ordered during the boom, or shortly thereafter. Those gross profit dollars were contracted and locked in. More importantly, ARII’s book to bill came in at 0.55x, above the industry average of 0.45x, but down sequentially from 0.73x. Looking a little bit deeper, 676 of the 1075 orders were for leases (for Icahn entities?). So third party book to bill really came in at 0.21x. Much, much lower than headlines suggest. That’s a little under ~3 quarters of third party backlog at 2015 run rate levels.
ARII does not give guidance. Lucky for them. Industry bellwether TRN also reported record consolidated revenues of $6.4 billion, record railcar deliveries of 34,295, and record EPS of $5.08. Why is the stock down 15% AH? They guided to $2.20 of EPS in 2016, down 55%. This is a company that will deliver 27k cars and has almost a 2 year backlog (49k cars), plus a nice mix of high margin leases. They are projected Rail Group EBIT margins of 15% in 2016, still way above normal, and down from 23.6% in 2015. Again, they are still working through a pre-bust backlog. Of note, the Street has ARII EBIT margins down 200bps in 2016. TRN’s commentary, like GBX’s, was dismal (ARII chooses to make very little commentary). At $18/share, TRN is now trading at a healthy discount to BV of $27 and TBV of $22. ARII trading at a 65% premium to book value, both of which have similar balance sheets and lease impairment risk (tanks and hoppers + other).
As for the buyback, the company’s 3Q15 buyback price averaged $38/share, 4Q buyback (just $6mm) averaged $36.5, and YTD buyback averaged $39. Take that how you please. And another thing I forgot to mention in the write up, the CFO quit in December and left in January. Again, take that how you please.
I contend the opportunity exists because people are looking in the rearview mirror. 2017 is going to be a disaster, and it could happen even sooner.
|Subject||Re: Re: ARII - For the record...|
|Entry||02/19/2016 10:52 AM|
Great writeup and commentary. Have been short this for a year now and think opportunity still very attractive here.
What people don't realize is that not only will manufacturing earnings get compressed for the next 2-3 years as shipments fall but also all "normalized" leasing run-rate EBIT estimates are way too high.
ARII is only now starting to roll their lease fleet (guide of 400+ cars or 4% installed base turning in 2016) and spot rates are collapsing. B/c they grew their fleet so quickly, the incremental annual earnings headwind from renewals is massive and will accelerate for the next 5 years unless oil lifts and leasing spot rates recover. Re-leasing spreads are probably ok now (b/c leases signed in 2010 were at low rates and may still below current spot), but the spread headwind gets worse every year (peak rates in 2015).
|Subject||Affiliate revs went to 0%|
|Entry||04/29/2016 10:23 AM|
Affiliate revs historically 40% of manufacturing revenue last 3 years. Q115 Manufacturing affiliate revs $121m...Q116 affiliate revs $553K. 2015 affiliate revs were $270m.
Seems Icahn pulled the plug on propping the business up. Manufacturing margins are toast.
|Entry||09/15/2016 11:04 AM|
Would love to get anyupdated thoughts here? Market still have blinders on?
I am just finishing up at the FTR transpo conference and sentiment could not be worse for railcars. Everyone I talk to thinks railcar estimates are still way too high and large portion of backlog will not be converted. Leasing businesses will be taking huge hits as they renew. in their words "there is simply no need to produce a new railcar for 3 years"
Botoom is probably something around 25-30k new cars in 17 or 18 --> 15k for replacement and 10-15k for replacement of damaged (although this might not even be necessary at some point). Obviously you have to go by specific railcar, but its instructive.
Growth areas look like plastic pellet (natual gas and petro chems), but doesnt seem like enough to move the needle form the loss in crude by rail, coal and frac sand.
Lastly, I think the short would be between GBX and ARII given Trinity is probably best in class and likely to recieve an unexpected large orders. Does anyone have an updated view on why you would be short ARII over GBX or vice versa? GBX took a huge dive heading into 2016 but is up YTD...cant understand why...
Other interesting short candidates might be new guys in leasing (Element?) that bought their way in recently and had to buy the worst assets with exposure to the most secularly presusred end markets. Has anyone done any work here?
|Subject||Re: ARL Sale|
|Entry||12/19/2016 03:10 PM|
I think the biggest reason for the move today is headline misperception. ARL, which is 3x ARI’s size, was a customer and a competitor, it is not ARII. But you know all this, and also know that TRN and GBX are not really up on this news. What’s interesting is IEP is down on the news.
So IEP is selling ARL for $2.8b (http://www.ielp.com/releasedetail.cfm?ReleaseID=1004851). According to the most recent Q, IEP has leased railcar assets of $3.6b on the balance sheet. ($11.4b of total PP&E, $4.1b of total leased assets, and $3.6b of leased railcar assets). Backing out the consolidated ARI leases assets of $0.895b and we get to ARL book value of $2.7b. And it was sold for $2.8b, a 3% premium. ARII currently trades at 70% premium to its TBV. My analysis of the $2.7b book value could be wrong though – the release says 29k railcars and IEP has 34.5k cars (45.5k railcars (http://www.ielp.com/common/download/download.cfm?companyid=AMDA-NOTM6&fileid=915552&filekey=90EA34C7-0B21-4F85-9F3D-8E63E3AAA413&filename=IELP_Webcast_Q3-2016_Final.pdf) less the 11k from ARI = 34.5k). Maybe the difference is the 4.8k car option and the correct comp should be $3.36b, a 24% premium? I’m not sure.
If we assume ARII sells their lease fleet at a 24% premium, that’s $1.1b (management claimed $1.2b of fair market value in late April, although the market has continued to deteriorate since then), that would be an extra $1,100-895 = $205mm less 35% taxes = $133mm /19.4 = $7 of TBV value accretion, so $35/share of TBV in a blue sky monetize-your-lease fleet scenario, where the remaining businesses (manufacturing and railcar services) are set to have negative EBIT starting next year and for the foreseeable future. What’s that worth? The value of this business is primarily in the lease fleet – and judging by lease margins and pricing in 3Q, that business will be rolling very hard over the next two years. Mgmt last quarter: “keep in mind that some of these leases are for cars where we booked the order at really high lease rates when the market was really strong several years ago. So keep that in mind.”
As for the initial thesis, no real change. Clearly the recover in oil prices has helped further boost sand demand, but the backlog still contains a massive amount of small cube hoppers and the industry is still in significant oversupply, meanwhile asset turns and utilization efficiency continues to improve. So I don’t see any new demand here for a long long time. Management also said we are in the later innings of the plastic pellet boom, so not much help there. And then with tank cars, Trump’s pro pipeline agenda should permanently impair crude by rail and those assets will likely need to be repurposed. Also, while tax cuts could be a nice short-term boost to profitability, the railcar manufacturing industry is very competitive so I struggle to see why ARII or others will continue to earn excessive ROEs or ROICs and suspect any after-tax over earnings will be competed away. In addition, the market clearly ignoring any FRA follow on risk, but judging by the Nov29 8-K, ARII is NOT ignoring that risk.
I hope some of you hedged this via long TRN and GBX because unfortunately the gross valuation gap has narrowed substantially, the wrong way. The risk reward still looks very attractive short here IMO and I think estimates are still 30+% too high for next year.
|Subject||Re: q4 EPS|
|Entry||02/24/2017 01:06 PM|
Did you notice their 0.0 book:bill? They produced 1300 cars and had 40 new orders. And they confirmed on the call there were no cancellations!
At that production pace, they have 3 quarters of backlog left.
The other thing I wonder about: the Dakota Access pipeline is coming online in Q2. When it does, that will effectively eliminate the last source of demand for crude by rail and release thousands of tank cars back into the market. Given the crude by rail business pretty much will be non-existent at that point, where do these tank cars go? It could be 10 years before we need to build a new tank car given the scale of the bubble, the young fleet, and the permanent lack of demand going forward.
|Subject||Re: Re: Re: Re: q4 EPS|
|Entry||02/25/2017 05:01 PM|
sorry, missed all these comments till i went to post this update. a lot of this stuff you guys touched on already, but going to post full thoughts anyway:
Positives from the quarter:
Negatives from the quarter:
The company only has 50-66% of their 2017 set. Barring a strong industry recovery (maybe some buyers are making a derivative sand bet? i'd argue wrongly...), ARII will fact a significant earnings cliff in 2H17 and 2018. Yes the goal posts have unfortunately moved due to better than expected orders in 2Q16 and 3Q16, and the valuation discrepancy vs peers has narrowed, but numbers for 2017 and 2018 are still 15% and 35% too high, respectively (IMO), and 1.7x TBV for this business is rich (when TBV is largely leased railcars that ARL just unloaded at ~1x TBV) given the cyclical and structural challenges to the industry going forward.