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Coverage Initiation: The Greenbrier Companies, Inc.
Value Line recently initiated coverage of The Greenbrier Companies, Inc. (GBX) in its flagship product, The Value Line Investment Survey. The company is a leading designer, manufacturer, and marketer of railroad freight car equipment in North America and Europe. It also makes ocean-going marine barges in North America. Greenbrier also provides wheel services, railcar refurbishment, and leasing, among other services, to the railroad and related transportation industries in North America. Roughly 90% of 2012 sales were generated in the United States. The company was incorporated in Delaware in 1981, and has its principal offices in Lake Oswego, Oregon. As of August 31, 2012, it employed nearly 7,400 people.
The company has three operating segments: Manufacturing; Wheel Services, Refurbishment & Parts; and Leasing & Services. The Manufacturing group (69% of 2012 sales) produces a broad array of railcar types. These include intermodal double-stack railcars in which containers can be stacked two-high on a single platform. This provides significant operating and capital savings. The division also makes conventional railcars, which can be used to transport forest products, automobiles, perishables, general merchandise, and commodities. Tank cars are produced for the transportation of toxic chemicals, including caustic soda, bio-diesel, and ammonium nitrate, among others. The group delivered 15,000 new railcar units in 2012, compared with 9,400 in the prior year.
The Manufacturing Group has a European division that produces a variety of railcars, including pressurized and non-pressurized tank cars, and coal cars, as well as flat and coil cars for the steel and metal markets. There is also a Marine Vessel Fabrication sub-segment that has a manufacturing facility in Portland, Oregon with marine vessel fabrication capabilities. The group produces river and ocean-going barges for transporting merchandise between ports within the United States.
Greenbrier’s second-largest segment is Wheel Services, Refurbishment & Parts (27% of 2012 sales). As the group’s name suggests, the division provides services that include the reconditioning of wheels, axles, and roller bearings, along with the refurbishment of heavy rail cars and routine railcar maintenance. The company believes this is the largest independent wheel services, repair, and refurbishment parts network in North America, with 39 locations. There are 12 wheel shops, 23 railcar repair and refurbishment shops, and 4 component parts facilities.
The company’s third, and smallest, segment is Leasing & Services (4% of 2012 sales). It offers software and services, including railcar maintenance management, railcar accounting services, fleet management using proprietary software, administration, and marketing. Greenbrier sometimes leases newly built or refurbished railcars to railroads or shippers, and sells the railcars and attached leases to financial institutions. It currently owns or provides management services to roughly 230,000 railcars.
Greenbrier’s primary customers include railroads, leasing companies, shippers, carriers, and transportation companies. Its customer base is fairly concentrated. In 2012, its top three customers, TTX Company (TTX), Union Pacific Railroad (UP), and BNSF Railway Company (BNSF) accounted for 53% of total revenues.
In terms of competition, there are currently six major railcar manufacturers in North America. In the marine industry, there are two primary competitors located in the Gulf States. In Europe, there are four competitors who produce railcars, most of which are located in Central and Eastern Europe, where wages are lower and work rules more flexible. There are many competitors for the wheel services, refurbishment, and leasing businesses.
From a risk perspective, the company has a noteworthy amount of indebtedness. As of February 28, 2013, Greenbrier had $478 million of total debt, or nearly 50% of total capital. In addition, as we mentioned above, a significant amount of its revenues are derived from a small number of customers, so the loss or reduction of business from one or more would have a material impact on business.
We think business prospects for Greenbrier are favorable. All three sectors are expected to grow in the coming quarters, thanks to improving economic growth in the United States and rising railcar demand. In addition, management recently announced restructuring initiatives that should improve margins through operational efficiency improvements and cost reductions. It also looks to redeploy some of its capital reserves from non-core businesses into new investment opportunities.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.