Greenbrier Companies: A Winning Trade (NYSE:GBX)

Since we founded Quad 7 Capital and started our private service, we have had just one goal, and that was to help the regular guy make money. Not the rich hedge funders. Not the guys who have been in the business for three decades. I am talking about the regular person who has a few thousand dollars or so to play with. It may not sound like a lot but there is money to be made even if you are starting small. With that said we are following up on a trade we just closed out for a big win in The Greenbrier Companies, Inc. (NYSE:GBX). This is a stock we have traded many times. Just two months ago we began buying again for a swing trade and got our members into this with conviction. Long story short we locked in a near 50% gain on this stock. We think it pulls back some with this market, and would be buyers again under $30. Rinse and repeat. This is a great trading stock, and that is what we do. But as an investment, it has been seriously painful. Dividends have helped, but the stock really seems to trade in a predictable range over the years and that is what we think you need to understand. Long-term investing works, but in the right stocks. Trading also works, in the right stocks. We think GBX stock is a short-term sell, to be bought back for a trade again. Taking profit here was wise as the market is now down due to the Federal Reserve’s relentless battle to reduce rampant inflation and insistence that they will not rest until the job is done. The company just reported fiscal Q4 earnings which showed some signs of strength and there was still a lot to like. That said, the economy is still in a precarious situation as a soft landing is looking more and more difficult. Let the market take this down, then do some buying, as operationally, the company is in better shape than earlier in 2022. Let us discuss.

Greenbrier Companies Q4 headline earnings

For a while top line strength has been overshadowed by high expenses and crimped margins, hurting the bottom line. Here in the just reported Q4, the top line exceeded our expectations reflecting efforts to have more operational efficiency. Q4 revenues jumped year-over-year much more than expected. We knew they would increase and we were more bullish than consensus in our expectations based on the trends year-to-date, along with the known backlog, and management’s ongoing efficiency plans. Revenues were up 59% from last year to $951 million, well above our expectations for $800 million. The top line was also well above consensus expectations, by $172 million. Just a killer result for revenues. A lot of this was driven by a strong book-to-bill once again, and executing on a comprehensive leasing strategy, increasing the number of railcars in the lease fleet in 2022 by nearly 40% to 12,200 units. Strong revenues and improved margins drove earnings power.

Earnings power was so much greater than consensus and largely were a result of the big top line and better margins. Gross margins improved from the sequential second quarter. Gross margin overall was 13.4% in Q4, up from 9.6% in Q3 and 8.0% in Q2. This was a result of higher deliveries and improved efficiencies, and that is welcomed.

Segment performance very telling

The segment specific margins offer more clues. Gross margin was 10.3% in the manufacturing segment. There were also more deliveries and better pricing, and operating margin was up to 7.6%. This was strong. There was higher production in the quarter and improved efficiency. Margins rose in the former wheels, parts, and repairs segment too, which is now the so-called “maintenance services segment”. Here in maintenance services, gross margins here rose to 10.6 % up from 10.2% in the sequential quarter. There were reduced revenue though by 14% as there were lower volumes compared to the usually strong Q3. In the leasing and management services margins rose to 73% from 65%, while revenue was up over 10%. Operating margin here also widened big to 53.0% from 46.7% in Q3.

Earnings expand and orders pick up

The company reported earnings of $20.2 million or $0.60 per share. Expenses to improve the business also had previously cost the company as capex expanded but is now paying off. There remain inflationary pressures and labor shortages which are leading to higher labor costs per employee. But that said there is a multi-billion dollar backlog and a stock offering a 3.0% dividend yield. The company continues to see strong orders and has a diversified backlog.

New orders in the quarter totaled 4,800 units valued at $620 million, which is strong. Deliveries were 5,800 in Q4. The key here is that the backlog is strong and is a critical indicator of future cash flow generation and earnings potential. In Q4, new railcar backlog was down a little from the 30,900 units in Q3 to 29,500 in Q4 with a value of $3.5 billion. Medium-term, the company is in great shape

Forward view

Looking ahead to the next fiscal year the outlook was strong. We still think you let the market knock this stock back some before buying though. As we look ahead you can expect 22,000-24,000 deliveries, with 1,000 of them in Brazil. Revenue should come in between $3.2 and $3.6 billion, rising from 2022. Capex is more reasonable, at $330 million, while the company plans to sell another $100 million of its equipment. Assuming comparable margins to what we saw in 2022, we see EPS coming in between $2.70 and $2.90. This suggests the stock is still reasonably valued here, but we think the market gives you a chance to buy lower

Take home

This was yet another winning trade on this stock. We took profit but think the market will give us another chance to buy. We like a hold generally here, despite taking trading profits. The outlook has improved, and the dividend is nice. Let it come down, then buy again.