Assessing Greenbrier Before Its Q2 Earnings (NYSE:GBX)

Although there is still plenty of cash waiting in the wings for worse times (which would result in cheaper valuations), the danger here is that we get a V shaped recovery which would leave many bears for dead. Irrespective of whether we get a V, a U-shaped recovery or even an L (which would mean no new highs for a considerable period), smart dividend growth investors know that compounding occurs more rapidly in an environment of lower prices when more shares can be bought.

The Greenbrier Companies (GBX) announces its second quarter earnings tomorrow before the bell. The company has been vocal to its employees and business partners of late as to how the firm has been dealing with the coronavirus pandemic. From a shareholder’s perspective, Greenbrier due to the nature of its business has been classified as an essential business given its role in transporting crucial items to respective destinations. Therefore, it is business as usual in Greenbrier as the firm remains fully operational in the US as echoed by CEO, Bill Furman.

The transportation sector we support is critical to helping our communities regain health and our economies regain strength. Greenbrier will be at the forefront of the recovery to come.

If we look at the long-term chart, Greenbrier as well as the transport industry in general has been hammered over the past month or so. Shares at under $14 a share now line up with prices (and support) which we witnessed back in 2012. Although we do not see a crossover yet on the monthly MACD indicator, the monthly histogram has been closing in on its zero line of late which illustrates that selling pressure may be diminishing.

Earnings projections for the second quarter have been cut in half over the past ninety days. Q2 projections now come in at $0.29 per share whereas the full year forecast has dropped to just over $2 per share. Although well down from the $2.87 EPS figure in 2019, Greenbrier should still comfortably be profitable this year.

When investing in beaten down stocks, it is imperative that the company in question is still earning a profit. Why? Because if there is more downside here in the short term, a profitable company is still going to be able to pay the lion’s share of its bills on order to keep operations alive.

Furthermore, the dividend has now spiked above 8% with the forward pay-out still being half of expected earnings this year. If that 8%+ was reinvested back into stock over the next 12 months, the cost-basis of the initial investment would be potentially decreased by well over $1 per share.

Some investors may fret over the fact that free-cash flow coverage over the past few years has been poor due to rising inventory and negative net-profit growth. When we see situations like this, we always go to the balance sheet to see if the firm can create cash-flow without affecting operations that much.

At the end of the first quarter, there was $2.95 billion worth of assets and $1.66 billion worth of liabilities. $847 billion of these liabilities were long-term debt. Both retained earnings ($871 million) and shareholder equity ($1.28 billion) are rising which is encouraging. Suffice it to say, the firepower is there to easily be able to increase operating cash-flow by increasing liabilities or decreases the firm’s assets in the short term.

Greenbrier is currently worth $471 million. As mentioned, the firm reported $1.28 billion of equity at the end of its first quarter. This means, the book multiple comes in at 0.37. This is the lowest book multiple we have seen in Greenbrier for more than a decade and by some margin. Remember buying a company’s assets as cheaply as possible (especially under book-value) greatly improves the odds of having a successful investment over the long term.

Therefore, to sum up, even if the second quarter and forward-looking guidance disappoints the market tomorrow, we believe Greenbrier at this valuation is a sound long-term play. Let’s see what is posted tomorrow.


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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GBX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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