FREIGHTCAR AMERICA INC RAIL
September 29, 2012 - 6:22pm EST by
vfm343
2012 2013
Price: 17.80 EPS $0.00 $0.00
Shares Out. (in M): 12 P/E 0.0x 0.0x
Market Cap (in $M): 213 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 105 TEV/EBIT 0.0x 0.0x

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  • Manufacturer
  • Coal
  • Transportation

Description

Freightcar America (Nasdaq: RAIL) looks really cheap and its probably because it has all the characteristics that can make a stock unsexy - deals with coal, railcar manufacturer, small cap. etc.. For those who care to look beyond surface beauty, RAIL is an interesting stock to analyze. I don't think its a screaming buy and that the stock will jump 50% in the near-term but it is a stock with some real potential to beat market in the medium term.. 


Basic outline of the Company:
- Manufactures and services railcars 
- leading manufacturer of aluminum railcars
- approx 75% market share in coal cars
- Increasing product portfolio by entering into new Intermodal car segment
- 2 manufacturing plants with production capacity of 5k - 7.5k railcars per plant each. Production is flexible, with scalable work force. In 2011, 941 total employee (164 salaried, 777 hourly wage) when it delivered 6.2k railcars vs. 464 employees (139 salaried, 325 hourly wages) to deliver 2.2k railcars
- Low fixed cost. Company has been able to get G&A expenses down to ~$6.5 mm per qtr.
- Customers are mostly railroads(~80%), shippers and financial institutes.

Industry: 
- There are approx. 1.5mm railcars in use in North America of which coal cars form approx. 270k. Demand for new railcars is highly cyclical (75k plus railcars in 1998 and 2006 vs. ~17k in 2002 and 2010). Demand is driven by industrial production, electricity utilization, and age of fleet
- Coal production decreased this year over last (~6%) and stockpiles are at 35% above 10yr average (mostly due to warm summers last year). However, coal exports was up 20% yoy and is demand is expected to remain strong
- According to Global Insight Freight Car Outlook, avg total demand for railcars over the next 5yrs is expected to be approx 55k

- Aluminium cars (53% of total coal cars) are primarily used in Western side and Steel cars are usually used on for eastern service. Steel cars currently in use are pretty old (80k cars above 30yrs) and industry is expecting to see an increasing demand from replacement of these railcars. Steel cars are old design (heavy and low payload capacity) and so they will be likely to upgrade their existing fleets of aging steel-bodied coal cars to modern, higher-capacity aluminium, hybrid aluminium and stainless steel, stainless steel bodied coal cars. 

- Intermodal cars is another segment into which the Company is currently trying to get into. New design has been approved and Company is currently marketing the product and excepting new orders. Itermodal cars are expected to have average demand of 10k cars per year but we will have to wait a little longer to see how the Company performs with these cars.


Valuation: 
Since I couldn't project what the macro economic scenario - electricity production from coal, export coal demand, replacement cycle and revenues from intermodal cars would look like, I valued the company based on multiple of EV to cash flows from type of years.

 

  Bad Year Average Year Good Year   Comments
Railcar Delivery # 4,000 6,000 8,000    
ASP $65,000 $70,000 $75,000   ASP varies from $65 - $80k depending on mix of cars (new, rebuilt, lease)
Total Rev (mm) $260.0 $420.0 $600.0    
           
Gross Profit Margins 7.0% 8.0% 10.0%   Margins typically range from 8 -10%
Gross Profits (mm) $18.2 $33.6 $60.0    
           
SG&A ($26.0) ($26.0) ($30.0)   SG&A has gone down in recent qtr and is close to $6.5 mm per qtr
Cash Flow  ($7.8) $7.6 $30.0   Capex and D&A are pretty much the same every year
           
Mkt Cap $213.0 $213.0 $213.0    
           
Cash $107.0 $107.0 $107.0    
Lease Car value $40.0 $50.0 $60.0   Current fair value is ~$65 mm
Total Cash Equivalent $147.0 $157.0 $167.0    
           
EV $66.0 $56.0 $46.0    
           
EV / Cash flow from Ops NA 7.4x 1.5x    

 

Even if one is pessimistic and would assume number of bad years to be equal to number of historical average years,  it would take less than 2 good years to justify current valuation.

Positives - reason to put some weight into the good years 
- Company is slowly diversifying its product mix from coal to intermodal cars
- New demand from replacement of steel car from eastern service areas (80k cars waiting to get replaced)
- Demand for coal from exports (mainly from emerging markets) is expected to growth even if domestic demand reduces..
- low cash burn in down market, no debt, high cash balance
- management has been buying stock personally, though in low volumes..

- Cost of RM like aluminum is fixed when orders are expected and so less direct impact to change in RM prices

Negatives:
- Increasing use of natural gas to produce electricity and environmental regulations  laws has reduced demand for coal
- variable purchase patterns in new orders, completion and delivery causes variation in quarterly revenues
- concentrated customers list (70 active customers) but top 5 customers formed 85% of total revenues in 2011
- Cyclic industry which is influenced by economic conditions. 75k plus railcars in 1998 and 2006 vs. ~17k in 2002 and 2010. 
- Management expects second half of the year to have lower new car delivery, lower gross margins and lesser new orders..

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

All the usual suspects - visibility on railcar replacement from the eastern sector , transparency on revenues from Intermodal cars,  coal demand etc..
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