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Coverage Initiation: American Railcar Industries, Inc.
Value Line has initiated coverage of American Railcar Industries, Inc. (ARII) in its flagship product, The Value Line Investment Survey. The company is a North American designer and manufacturer of hopper and tank railcars, which are used to transport dry bulk products. Operations are divided into three segments: manufacturing (89% of 2012 revenues), railcar leasing (2%), and railcar services (9%). Manufacturing consists of both railcar manufacturing and industrial component manufacturing. Leasing consists of railcars manufactured by the company and leased to third parties under operating leases. Railcar services consist of repair, engineering and field, and fleet management services.
American Railcar can trace its roots all the way back to 1899, when Milton Car Works and 12 other railcar builders formed the American Car and Foundry Company (AC&F). In 1922, AC&F expanded into the automotive industry, which began a long period of diversification and expansion into bus and street car manufacturing. By 1954, AC&F had become so diversified that the name was changed to ACF Industries. Fast forward to 1994, and American Railcar Industries was formed from the acquisition of railcar component manufacturing and railcar maintenance assets from ACF Industries. The company is headquartered in Saint Charles, Missouri on the grounds of AC&F’s original manufacturing center. It employs over 2,600 people. And, ARII stock began trading on the NASDAQ exchange on January 19, 2006.
Historically, the railcar manufacturing industry has been extremely competitive. In addition to price, businesses mainly compete on quality, reputation, reliability of delivery, and customer service. Industry peers include Trinity Industries, Inc. (TRN), The Greenbrier Companies, Inc. (GBX) and National Steel Car Limited in the hopper railcar market and Trinity, Greenbrier, and Union Tank Car Company in the tank railcar market. American Railcar also experiences intense competition in the railcar leasing business from railcar manufacturers, banks, and other financial institutions. Some of the lessors it competes with also happen to be its customers.
The company’s primary customers include leasing, industrial, and shipping companies. In servicing this customer base, American Railcar’s integrated railcar repair, refurbishment, engineering, and fleet management services and railcar components manufacturing business help it further penetrate the general railcar manufacturing market. In addition, the company offers customers the opportunity to lease railcars. This provides it with cross-selling opportunities and helps to build deeper relationships with clients.
Overall, the North American railcar market has been, and will likely continue to be, highly cyclical. In times of economic downturns, the railcar market can be significantly affected. Indeed, in 2009 and 2010, sales of railcars and other products slowed, resulting in decreased production rates. Consequently, the company saw its sales fall from about $810 million in 2007, to roughly $425 million in 2009, and almost $275 million in 2010. However, new orders and shipments of railcars steadily increased in 2011 and 2012, giving a boost to the company, driven by higher demand for shipments of certain commodities, the replacement of older railcars, and federal tax benefits. Although we have seen improvements in the railcar market in 2011 and 2012, we do not envision much more growth over the next five years.
The credit cycle also has a large impact on this company’s operations. Because most end users of the company’s railcars acquire them through leasing arrangements, sales tend to fall in times of tight credit, because of higher borrowing costs.
A large risk specific to this company is its limited customer base. In 2012, sales to American Railcar’s top ten customers accounted for about 83% of revenues. Further, its top three customers, CIT Group, Inc. (CIT); American Railcar Leasing LLC; and AEP Leasing, accounted for approximately 50%, 9% and 8% of the top line, respectively. The last two are affiliated with Mr. Carl Icahn, who happens to have an almost 56% ownership stake in American Railcar.
For a more thorough look at American Railcar Industries, and the particular investment merits of its stock, subscribers should examine our full report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the stocks mentioned.