We think it is time to start buying The Greenbrier Companies, Inc. (NYSE:GBX) for a trade. This is a stock we have traded many times. Back in late summer 2022 we began buying again for a swing trade and got our members into this with conviction. We locked in a near 50% gain on this stock. Had you bought and held, you would be back to square one. Buy and hold investing can work in the right stable blue chip names, but our goal is building your bankrolls and actively managing your holdings is the best way to do this. When we detailed closing this trade we last stated that “we think it pulls back…and would be buyers again under $30. Rinse and repeat”. Well here we are following a fiscal Q1 earnings that saw margin pressure and mixed performance. Shares are at $28.60 at the time of this writing. We like buying from here to $25, and offloading in the low $30s on this trade. Folks, like it or not, this is a great trading stock, and that is what we do. But as an investment, it really does not work. Dividends help, but the stock trades in a predictable range over the years and that is what we think you still need to understand about this stock. The market has taken this down, so let’s do some buying, as short-term operational pressure will abate, and the stock will inevitably head higher again in our opinion. Let us discuss.
The play
We like entering commons in the following approach:
Target entry 1: $28.40-$28.75 (40% of position)
Target entry 2: $26.25-$26.60 (60% of position)
Stop loss: $22
Short-term target exit (with just one leg completed, $34, if both legs purchased, $32)
One can consider selling puts here slightly out of the money two months out to either collect premium and/or define entry if assigned.
We also like selling upside calls around the target exit strike 3-4 months out for added income while waiting for the trade to play out. If the stock is motoring, we can roll them.
Greenbrier Companies Q1 headline earnings
One of the things we have noticed with the company is a lot times, there is top line strength but high expenses and crimped margins, hurting the bottom line. That was the case in Q1. Here in the just reported Q1, the top line exceeded our expectations on the top line. Q1 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 coming into Q1, along with the known backlog, and management’s ongoing efficiency plans.
Revenues were up 39.2% from last year to $766 million, well above our expectations for $750 million. The top line was also well above consensus expectations, by $26.6 million. Just a strong result for revenues. A lot of this was driven by a strong book-to-bill once again, and executing on a comprehensive leasing strategy, and increasing the number of railcars in the lease fleet. The company is working to purchase the outstanding interest in GBX Leasing and increased the owned fleet to 14,100 units, or nearly 65% more since April 2021. During fiscal Q2 (the present quarter), the company completed the acquisition of the remaining interest. This will help fuel revenues going forward as leasing rates are projected to be strong in the future.
Earnings on the bottom line were a bit of a disaster on the headline result. The adjusted EPS of $0.05 missed our expectations for $0.50 in earnings badly, and missed the Street consensus by $0.43. How can this happen with such a strong top line? Admittedly, it was a surprise, and the stock sold off as it should as the Street has to reduce its EPS expectations for the whole year thanks to this big miss. So how did this happen. First there was a $24 million impairment at Portland, factoring that in, EPS was a loss of $0.51, so that should be stated. But excluding this loss, we still had a big miss. It was due to margins being crushed. As new railcar production ramped up, manufacturing margins were nailed as parts were more expensive, there were supplier issues, and some supply chain delays. We view this as a short-term issue and that is why we think the stock is a buy, it will get re-rated higher as the Street digests the reality. Keep in mind, we learned too in the release that
“We have been executing a plan to source key components internally, which we expect will be completed by the fourth quarter of this fiscal year. This will meaningfully reduce our input costs and provide us greater control over our supply chains.”
Gross margin overall was 9.1% in Q1, down 430 basis points from the 13.4% in Q4, and the lowest since 8.0% in Q2 last fiscal year. This was a result of the poor manufacturing margins and supply chain issues. Again, this problem will abate later this year. The closing of the Portland facility will also save money and reduce costs. We like buying into this weakness.
Segment performance
The segment specific margins really show that it was not just manufacturing segment weakness, rather, broad based margin pressure. Gross margin was 6.5% down from 10.3% in the manufacturing segment. There were also fewer deliveries, but better pricing, however operating margin was -0.5%, a far cry from 7.6% last quarter. But the pain was not just in manufacturing as margins fell 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 fell to 6.9 % down from 10.6% in the sequential quarter, and 10.2% in fiscal Q3 last year. Awful. There was slightly reduced revenue as there were lower volumes than Q4. In the leasing and management services margins also fell from 73% to 62.6%, while revenue dropped nearly 25% on lower syndication activity.
Earnings pressure, but orders pick up
The company reported earnings of $1.6 million or $0.05 per share. There remain inflationary pressures and labor shortages which are leading to higher labor costs per employee, along with ongoing supply chain issues, but this is a short-term issue. We believe pricing changes will offset much of this, and the move to source components internally is a gamechanger. So while this quarter’s earnings were really painful, and will impact the entire year, there is a multi-billion dollar backlog and a stock offering a near 4.0% dividend yield at our entry points. The company continues to see strong orders and has a diversified backlog.
New orders in the quarter totaled 5,600 units valued at $700 million, which is strong and was much higher than the 4,800 units ordered in Q4. Deliveries were 4,800 in Q1, but that does not include 2,300 leased rail cars produced onto the balance sheet as well. Those will be leased or syndicated. The key here is that the backlog is strong and is a critical indicator of future cash flow generation and earnings potential. In Q1, new railcar backlog was down a little from the 29,500 in Q4 to 28,300 with a value of $3.4 billion. So while the short-term pain of this quarter’s margins crushed earnings, this will be resolved in the medium-term. We think money can be made here on a trade.
Shareholder friendly
While we view this as a rather rapid-return trade that likely plays out in a quarter, keep in mind, there is the aforementioned dividend here which makes owning the stock attractive. We think the payout is safe so long as the next 2 quarters do not see the immense pressure that fiscal Q1 experienced. The board also renewed a $100 million share repurchase program.
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. Now, before this quarter we were assuming comparable margins to what we saw in 2022, and we saw EPS coming in between $2.70 and $2.90. With the Q1 performance and likely pressure on margins in Q2, we believe margins for the year track around 10%. Assuming CAPEX of $330 million, we now view EPS of $1.85-$2.25 as likely. So where does that leave us? Well, taking the mid-point, shares are valued at 14X FWD earnings. This suggests the stock is still reasonably valued here, and, with the likelihood of improving costs later this year, we suspect the stock recovers.
Take home
We let the stock come down, it is time to buy again.
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