American Railcar Looks Like a Good Investment
The weakness in oil and coal shipments has created pressure on railcar manufacturers, and American Railcar (ARII) is no different. The stock is down more than 22% this year despite beating analysts’ estimates in the last two quarters. This is not surprising as its revenue last quarter was down almost 20%. However, investors should not ignore the positives about American Railcar.
Making the right moves
American Railcar’s manufacturing segment is doing well due to a higher mix of direct sale shipments relative to railcars shipped for the company's lease fleet.
Apart from this, it is diversifying its business and evaluating opportunities to further expand its manufacturing flexibility and repair capacity that will meet current as well as anticipated demand for retrofits, tank certifications, and railcar maintenance. For instance, it began a project to enhance its tank railcar manufacturing facility that will expand capacity for repair projects.
Further its agreement with ACF is yet another move that will strengthen its top line. According to management, “ARI will receive 30% of the net profits (as defined in the agreement) for Repair Services related to all railcars not owned by ARL or its subsidiaries and 20% of the net profits for Repair Services related to all railcars owned by ARL or its subsidiaries, if any, but will not absorb any losses incurred by ACF.”
Cost reductions are another positive
American Railcar is exploring all possible alternatives to reduce its expenses. On account of increased borrowings to support the growth of its lease fleet, American Railcar has incurred an interest expense of $5 million in the last reported quarter as compared to $2 million last year. But, management hopes to offset this impact by the additional revenue generation from railcars added to its lease fleet.
Further, the company has refinanced its prior lease fleet financings during the quarter, which increased cash and extended maturity of its debt. More importantly, the debt is now available at a fixed rate that will minimize the affect of rising interest rates that could otherwise have weighed on its financials. Currently, its total outstanding debt is at $614 million on its lease fleet financings facility and has a net cash of $236 million. With such initiatives the company should have sufficient cash flow to pay dividends even after paying interest expenses.
All in all, American Railcar seems to be on the right track and could do well in the future. Although there is no significant change in its forward P/E of 7.96 as compared to its trailing P/E of 7.54, but analysts anticipate its earnings to grow at 6% per annum in the next five years, which is quite encouraging.
Moreover, American Railcar’s P/S multiple of 1.11 as compared to the industry average of 1.51 indicates that the stock is undervalued at current levels. Therefore, in the light of these facts, investors could use the current decline in its stock price to initiate a long term position.