Rail Theory Forecasts™ LLC

Annual Publication

North American Rail Car Market

Wheel Manufacturers

Griffin Wheel (Amsted Ind.)

Standard Steel Corp.

Cast Parts Producers

ASF (Amsted Ind.)

Ohio Castings

Rail Castings Corp.

Miscel Parts and Services

WabTec (WAB)

LB Foster (FSTR)

Portec Rail Products (PRPX)

Railcar Builders

Trinity Industries (TRN)

Freightcar America (RAIL)

Greenbrier Co. Inc. (GBX)

Union Tank Corp.

American Railcar Ind. (ARII)

National Steel Car

Suppliers

August 1 , 2008

Freightcar America (RAIL) succumbs to high material costs and low demand

Railcar builder Freightcar America reported a quarterly loss of $0.08/share due to high material costs impacting fixed price contracts and the need to restrain prices in a very slow market for coal cars. Management expressed confidence that demand for coal cars will remain strong in the future, especially if all the new coal fired utility plants that have been in various stages of planning and construction for the past several years come online in the near future. The EIA has questioned the need for all of the new coal fired power at this time, and with the recent declines in the price of natural gas, it is possible that some of the plants may never be built.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

August 1 , 2008

Trinity is recapturing market share in declining railcar market

Trinity Industries (TRN) reported earnings growth and increasing orders and deliveries in an otherwise declining market for new railcars, a feat that will probably elude the other railcar builders. Its 6,580 deliveries during the second quarter represented a 44% market share for the entire industry, and its orders for 7,430 cars accounted for 61% of the industry total. Moreover, Trinity said it expects its earnings in the third quarter to be close to those of the second. Is Trinity returning to its old strategy when it and its merger partner Thrall Car had an annual 61% market share?

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

June 11 , 2008

Demand for coal cars will increase, but so will Freightcar America’s competition for orders

Overlooking the author’s tendency for hyperbole and his greatly distorted timeline of history, his conclusion that demand for new coal cars will soon return is right on target. He is also right in highlighting the current danger to those builders who might be exposed to fixed price contracts and escalating steel and specialty parts costs. However, he overlooks one crucial new element in the market for coal cars that Freightcar America (FCA) did not face the last time demand surged for its products: competition. In 2004, the last time buyers changed course and began ordering cars, FCA enjoyed an almost 100% market share. This time however, they will have to contend with a resurgent Trinity Industries (TRN).

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

May 8 , 2008

Coal car builder Freightcar America blames poor economy while coal traffic is up 4%

CEO’s never like to go into lengthy explanations on the dynamics of their industry in explaining a dismal financial performance, but with year to date coal volumes up 4.6%, according to the most recent AAR report, blaming the economy for the problems besetting the company seems more like dodging the issue than helping shareholders understand the situation. The new president of FreightCar America cannot be blamed for how the company found itself in these waters, but a better explanation of the problems might have given shareholders more confidence in his ability to navigate the company in the future.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

April 18 , 2008

New car production losses at Greenbrier (GBX) are eating into overall profits

During the last downturn in the railcar building industry, Greenbrier gained market share while cutting back production since the cars it produced were more popular that the car types manufactured by the other builders. This time around, just the opposite is true; there is almost no demand for the intermodal well cars, lumber flats, and boxcars that carried Greenbrier through the last recession, but there are still buyers for the coal, tank, and grain cars manufactured by the other railcar builders. In response to market conditions, Greenbrier closed its Canadian plant last year and began to solicit orders in other car types such as covered hoppers and tank cars. Manufacturing margins for these car types will be slim for a while as Greenbrier buys its way into these new markets. In the mean time, its plants are not operating at the levels that are necessary to earn a profit in this marketplace.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

April 2 , 2008

Idle cars mean cutbacks are coming for railcar builders

The decline in trailer and container shipments, especially those originating at West Coast ports, has resulted in a large surplus of railroad intermodal cars, specifically the doublestack well cars used to handle containerized imports. BNSF (NYSE:BNI) has been reported to have parked thousands of well cars around its system. Other railroads are reporting, however, that surplus quantities are no greater than might be expected at this time of year due to the seasonal nature of this traffic. Nevertheless, with traffic down significantly from last years’ levels (-4%), it’s hard to imagine how the seasonal railcar surplus looks normal.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

March 6 , 2008

Chill in ethanol industry may give railcar lessors a bad cold

The growth rate of the ethanol industry has slowed significantly in recent months as the price of corn pinched the profit margins of most firms and put some inefficient producers out of business. With corn prices at $5.55/bu., reformulated gasoline (ethanol) prices must be above $2.00/gal just to break even, and prices last summer dipped as low as $1.50/gal. after a small surplus of ethanol developed. As uncertainties about costs, prices, and demand increase, producers are scaling back their plans for expansion. Railcar lessors however, have already committed to buy, or have already taken delivery of enough railroad tank cars to move the previously projected production total of 10 million gallons 2008. Car surpluses are developing as lessees walk away from commitments, a rarely used and dangerous practice for most users in that industry.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

February 6 , 2008

Icahn is known for his patience and he will need it with Greenbrier (GBX)

Carl Icahn’s purchase of a 9.5% stake in Greenbrier Cos. seems to imply that he intends to pursue a merger between American Railcar (ARII), in which he controls a majority of the stock, and Greenbrier, two railcar builders with complimentary design portfolios and railroad business interests. The two companies each lack what the other possesses and the merger might be a good strategic move in an industry plagued by cyclical swings. However, Greenbrier’s manufacturing output has declined for the past two years and looks to fall again in 2008.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

February 6 , 2008

Wabtec scores second win in sales of its high tech brake technology

Southern Company, a southeastern utility which owns and leases a large fleet of railcars, gave Wabtec and order to equip 300 of them with electric brakes. The NS and BNSF railroads had been given approval to operate trains with electric brakes in 2007, after which NS ordered 210 electric brake systems for its coal cars from New York Air Brake Corporation. Around the same time NS had given Wabtec an order to develop a system to electronically manage its train operations. http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

January 29 , 2008

The fourth quarter orders for new railcars were inflated to make a bad situation look good.

Last week the ARCI released the railcar industries results for the fourth quarter of 2007, including 23,722 new orders, 14,862 deliveries, and a backlog of 75, 860 cars. Normally, those types of numbers would signal a rising production schedule in the year ahead. Instead, total deliveries in 2008 are expected to fall from the 63,156 delivered in 2007 to around 48,000 in 2008.  The reason for the discrepancy is the number of orders that have been reported for cars that will be built after 2008.  http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

January 22 , 2008

Greenbrier needs a better second half to match their regular earnings in 2007

Greenbrier’s reported earnings that were only one third of what had been expected, and even before the special charges due to more plant closing costs and currency losses, the earnings would have been 30% lower than had been recently estimated for the company. Greenbrier tried to put a positive spin on the performance by comparing it to their first quarter of 2007 when they earned $0.12 vs. the $0.16 this year. The comparison was partially appropriate; in a weak new railcar market, the winter months are much worse for Greenbrier than other companies because buyers of intermodal equipment usually prefer to take delivery of their new cars in the second and third calendar quarters. During last year however, Greenbrier had other problems besides a weak market that hurt earnings during their first quarter.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

January 22, 2008

Railcar builders are in two camps, those in for a rough year, and those holding their own

It is difficult to argue with Chris Versace’s facts regarding the past performance of the railcar builders and the railcar industry in general. This is a cyclical industry and the past is often prelude to the future. However, his broad assertions that roughly apply to the industry as a whole and perhaps to general trends at each company overstate the “problems” for some companies, painting some good companies with the red ink that might only apply to a few. The key to separating out the winners and losers is to know what types of cars each builder profitably produces and what cars are going to be built.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

December 26 , 2007

Union Tank Car will probably remain independent

Berkshire Hathaway announced that it had agreed to purchase Marmon Holdings, Inc. from the Pritzker family. Union Tank Car Company, the oldest railcar lessor and tank car builder in the nation, is owed by Marmon and has been the subject of rumors during the past year regarding a possible sale of the company. Until the purchase by Warren Buffet’s company was announced, the divestiture by Marmon of some or all of its holdings was a distinct possibility. It now appears as though Union Tank Car is no longer for sale.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

December 20 , 2007

Freightcar America seems to be grooming itself for a sale

Freightcar America announced that they were closing the production facility in Johnstown PA after failing to reach an agreement with the unions at the facility to restructure their agreement. The company said that the costs would amount to $34.3 million and would be subtracted from the fourth quarter results. Orders are down and production in 2008 looks likely to be less than deliveries in 2007, so the company should have no problem meeting all their current commitments with deliveries from their other plants. If the estimated costs of closing this facility are correct, then this company looks very attractive as a takeover target in 2008.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

December 7 , 2007

Railroad tank car production to decline in 2008 at Union Tank

Union Tank Car announced that it is reducing its production rate at two of its three manufacturing plants effective immediately. Moreover, it is possible that production will also be reduced at the Alexandria LA. The company has indicated that demand has been falling and that the production, which had been increased to accommodate the surge in orders for ethanol cars, will now be reduced to normal levels. The question which should be asked is what happened to the 33,000 backlogged orders at the end of September?See http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

December 7 , 2007

Counter cyclical earning potential for WABTEC

Wabtec announced that they had been awarded a contract by Norfolk Southern (NS) to develop a positive train control (PTC) system. PTC is the first change in the basic method of controlling train operations since the current system was first established in the late 1880s. Previously, the BNSF had awarded a contract to Wabtec to install an Electronic Train Management System (ETMS) on its lines after the Surface Transportation Board (STB) had approved of a system that Wabtec had developed and tested for NS and BNSF. Wabtec is also working with Union Pacific (UP) on a similar EMTS project that has not yet been given installation approval by the STB. See http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

October 15 , 2007

Don’t anticipate greater profits soon from Greenbrier’s venture into tank car manufacturing

Greenbrier’s surprise announcement that it will build new tank cars in the future for GE Rail Services was a bold and badly needed development for that railcar builder, but don’t anticipate much profit growth in the near future from this new venture. Demand for Greenbrier’s main car types, double-stack intermodal cars, lumber flatcars, and general purpose boxcars are still falling and Greenbrier’s railcar deliveries in 2008 should fall below their depressed count for 2007. Moreover, Freightcar America (RAIL) and American Railcar (ARII) are both testing new intermodal cars which will claim some of the market share from Greenbrier when demand for that car type recovers. See http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

October 15 , 2007

Downturn of railcar cycle confirmed by latest quarterly ARCI report

The railcar builders association, the ARCI, reported that in the third quarter, only 8,121 new railcars were ordered, bringing the total orders for the year to roughly 31,000 cars. Moreover, deliveries decreased to 15,032, bringing the year to date total to 48,296. At Rail Theory Forecasts, we had predicted last fall that the total deliveries for 2007 would only reach 61,500 cars, compared to the 74,000 units delivered in 2006. Our preliminary forecast for 2008 in much lower, and the third quarter data appears to support out early prediction.

See http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

August 20, 2007

New railcar plant to rekindle competition

National Steel Car Ltd has been producing railcars in Canada for many years, and has enjoyed the support of the two Canadian Class I carriers. Although it has a US sales force, orders from US customers have been hampered by the location of the plant in Hamilton, Ontario, high Canadian labor costs, and recently, a strengthening Canadian dollar. National has produced most car types and has competed with all US railcar builders, although not very successfully. All that may change with the opening of its new plant in Alabama in 2009; the “friendly” railcar competitors in the US will have to admit a not-so-friendly rival from up North. See http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

August 20, 2007

Watch out for the hype on Freightcar America

Freightcar America is suffering from a dearth of coal car orders that is likely to last at least a few more quarters. After averaging over 6,500 cars per quarter during 2005, a downward trend in demand for coal equipment started during the first quarter of 2006 and has averaged less than 2,800 cars per quarter for the last seven periods. Industry production backlogs have steadily fallen as deliveries outpace demand for new cars. The situation will eventually improve for the builders, but not because demand for coal will suddenly jump or a surge in 25-year-old cars will have to be replaced. Demand for new cars will resume when the surplus of cars created during the past few years Is efficiently absorbed into the system. See http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

August 20, 2007

American Railcar Stumbles

Although they had record revenues and railcar delivery totals, American Railcar was not able to increase their profits much above the same period in 2006 when they shipped 18% fewer railcars. Management explained that their production facility at Paragould Arkansas, which produces covered hopper railcars, was operating at less than full capacity, and that the types of tank cars, which are built in Marmaduke, Arkansas, were different than in the past and that the margins were lower on the recent mix of cars. The railcar market in the future looks less promising than the recent past and some cost cutting may be necessary to get margins back to past levels. See http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

July 18, 2007

Quarterly data is sometimes misleading for railcar companies

Greenbrier says that its attention to costs allowed it to reverse the $0.38 loss in its second quarter with a $0.81 per share profit in its third quarter, bringing its fiscal year income out of the red and up to a $0.55 per share profit. Management always wants to be seen as being in “control”, mitigating bad developments, and capitalizing on market opportunities as they happen; but perception is not always reality, especially in the case of Greenbrier, and to a lesser degree, the other railcar companies. The problem lies in the relatively short time of a reporting quarter and the large sums involved in individual railcar transactions. See http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

June 28 , 2007

Freightcar America adds some sugar to make bad news more tasteful

Freightcar America’s announcement that its second quarter earnings will be only half of what was earned during the first quarter, down to 30% of the 2Q06 earnings, and 25% below recent estimates of $1.20/share were included with an announcement of a commitment by a company to order 1,900 new hopper cars as replacements for older cars in 2008. Very few orders for new aluminum coal cars are expected this year, and the announcement that a large fleet owner plans to replace some of its older hopper cars could not have come at a better time. Moreover, the order may signal that the recent (2006-2007) trend to replace the old open top hopper fleet with manually operated gates will continue into 2008 and that perhaps the 88,000 car fleet will not disappear by 2015 as past trends might have suggested. See http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

June 27 , 2007

Trinity Leasing update ---see May 11 commentary

Trinity Industries has found a way to have their cake and eat it too. The new leasing joint venture will allow them to report a manufacturing profit on cars they intended to build for their own lease-fleet portfolio. Instead of owning the cars with a large (80%) debt, they will own a portion (20%) of the cars and give their partners and 80% equity interest.

May 11 , 2007

Investing in the future sometimes hurts present earnings (TRN)

Trinity Industries reported 1st quarter earnings of $0.74 per share, compared to their best quarterly earnings from ongoing operations of $0.71 in the fourth quarter of 2006. Moreover, their backlog of unfilled orders increased to an all time high of 37,790 cars, which represented almost 50% of the total backlog for the car building industry. However, they also announced that the will be building cars for their own lease fleet during the second quarter and for the remainder of the year. This will reduce their manufactures earnings since they are not allowed to report a profit on cars sold to another division. See http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

April 19 , 2007

Bifurcation of railcar builders into haves and have nots

The ARCI announced that during the first quarter, the North American railcar builders delivered over 17,000 new railcars but received orders for just more than half that total. As a result, the backlog of unfilled orders fell from roughly 85,000 to 79,000, which is still more than will be built in 2007. The backlog is heavily weighted with cars associated with the ethanol industry, namely the tank and jumbo covered hopper cars. Those builders who fabricate these car types are looking at backlogs extending well into 2008, while builders of other car types don’t have enough orders backlogged to keep production going at the current rate past September. See http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

April 4 , 2007

It will all be downhill at Greenbrier for while

Greenbrier (GBX) announced today that it lost $0.38 per share during its second quarter after a disappointing profit of $0.12 per share during its first quarter. Analysts had expected $0.54 per share in both quarters prior to the earnings announcements. The railcar models for which Greenbrier is best known have been in surplus supply for several months and the end of this situation is not in sight. Railcar production facilities that are not running near capacity can be big drains on corporate cash and that is why most plants are built to only produce around 3,000 cars per year. There was no business in sight for the Trenton plant and the decision to close the facility was a hard, but necessary one. Greenbrier has made more than its share of tough decisions over the years, and it might have to make even more in the future. See http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

March 23 , 2007

For railcar builders, the roller coaster cycle is still a problem and a soft landing a myth

The Wall Street Journal article of Mar 22 proclaimed that railcar builders can expect a soft landing when falling from the 75,000 railcar delivery rate posted in 2006. The writer quoted forecasters who expect to see deliveries of 69,000 railcars in 2007 and close to that number for the next few years. According to some experts the writer consulted, the railroads are flush with cash to pay for more equipment and half of the national railcar fleet is over 25 years old and needs to be replaced. I was interviewed at length for this article and was also quoted for a tidbit of information that I supplied, but the writer chose to ignore my forecasts and stick with the more optimistic projections of industry leaders. I believe he made a mistake! See http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

March 12 , 2007

Greenbrier (GBX)-- Greenbrier has little to offer even with concessions

The labor union at the Nova Scotia plant of Greenbrier Corp had already rejected the company’s request for contract concessions and a three year freeze on wages and was set to strike when government officials asked for a postponement in order to arrange a meeting involving government, union, and company personnel. The plant had been closed during the fourth quarter and was opened in January for a single order that will be completed by April if there is no strike. The union has few options since Greenbrier has little to loose if they shut the plant permanently.

See http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

March 5, 2007

Freightcar America (RAIL)--Good news for bad times

The FRA recently refused to guarantee the $ 2.3 billion loan needed by the DM&E Railroad to extend its lines into the Powder River Basin coal producing area. The FRA stated that the size of the loan and the financial resources of the company created doubt that the railroad could pay back the loan. The company is pursuing other means of funding their $6 billion expansion. Meanwhile, the prospects of Freightcar America (RAIL) getting any orders in 2007 for the fleet of new coal cars that the DM&E might have needed are also fading, along with prospects for L. B. Foster Company (FSTR) laying any new rail lines for the railroad. See http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

February 15, 2007

GATX (GTM)---Railcar leasing business is red hot

GATX Corp. announced that the utilization rate for their fleet of railcars (i.e., the percentage of unitsactually under lease and earning revenue) was up 1% in 2006 from the 98% rate achieved in 2005. Most railcar leasing companies think they are doing well anytime rates are above 95%, so the 99% utilization rate posted by GATX was outstanding. In addition, GATX said that lease rates climbed 19% for cars up for renewal and that net earnings increased 50% over the same period in 2005. Earnings should continue to improve during the next several years for this and other railcar leasing companies if they all don’t get too ambitious or if too many newcomers using borrowed money don’t try to join the parade.See http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

Wabtec (WAB) scores a big one

The Federal Railroad Administration (FRA) has given its approval for the BNSF Railroad (BNI) to proceed with a complete network installation of the Wabtec designed PTC (Positive Train Control) system that has been undergoing field tests on 135 mile stretch of railroad in Illinois. The BNSF has a system network of over 33,000 miles of track, 25,000 of which is wholly owned. With almost BNSF 5,000 locomotives to equipment with the necessary hardware and software, Wabtec will be off to a fast start in developing this new technology for controlling railroad movements, but their system is only a first step and their competitors are developing more advanced systems with other railroads.See http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

November 15, 2006

Greenbrier (GBX) --All that glitters....:it might be too good to be true

Greenbrier (GBX) announced a strong earnings performance for their 2006 fiscal year which ended on August 31st, and they highlighted their backlog of 14,700 cars in August compared to 9,600 cars at the same time last year. The growth in profits was remarkable given the 13.6% decline in new car deliveries. The company is investing in new railcars for its leasing business and buying shops and companies to grow the railcar repair business in order to diversify their business. However, it will be another tough year for the new railcar manufacturing side of the business, since much of the backlog involves cars ordered in a multiyear contract for delivery after 2007, and many cars that the company built on spec during its first fiscal quarter remain unsold and in storage.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

November 15, 2006

American Railcar (ARII)---A reversal of fortune

American Railcar (ARII) reported that although tornado damage hurt production at their tank car plant during the third quarter, their earnings more than tripled, and their backlog of unfilled orders climbed to over 18,000 cars. Adjusting for the lost production between May and August at the tank car facility, the company’s backlog represents over two years of production at the current rate of output, which will most certainly climb over the next few months.

http://www.glgroup.com/Council-Member/Toby-Kolstad-85066.html?obj=search&Keyword=kolstad

August 23, 2006

Trinity Industries, Union Tank, and American Railcar

The railcar builders that manufacture tank cars have seen orders and backlogs climb in recent months, as the booming ethanol business requires more and more railcars. All three builders have been rushing to meet demand, with plans or new facilities to increase their annual tank car capacity. Trinity (TRN) has been expanding their tank car plants in Longview TX with a $7million upgrade; American Railcar (ARII) has just doubled the capacity of its tank car facility in  Marmaluke AR, disabled by a tornado during the second quarter, and plans to open a second plant at the site by 2008; and Union tank opened their third tank car facility in 2005 in Alexandria VA. Prior to this year, annual production rates never exceeded 12,000 cars. With the new facilities and booming ethanol business, tank car production should climb to the 16,000-20,000 car per year range for the foreseeable future.

August 9, 2006

Railcar Builders

Profits at all railcar builders continued to climb in the second quarter, some more than others, but stock prices have fallen dramatically from their recent highs. One of the reasons for the apparent disconnect between profits and prices is the negative mood of investors who fear that an inflation-caused recession may be on the horizon. Such feelings have been identified as the reason for the decline in railroad stocks, even as those companies are also reporting record earnings. On a more specific basis, the railroad industry is viewed as a cyclical business and many analysts think that the growth cycle is ending and that a decline in imminent. Investment managers are looking to catch the next wave in another area, leaving only diehard railroad and railcar investors to trade stocks in this industry.  RTF does not think that the cycle has yet peaked, although some car types and some builders will sustain a pause in growth while others will see their fortunes improve as demand for new railcars shifts from coal cars and flatcars to tank cars and covered hopper cars. Overall demand for the former cars is only expected to fall to more sustainable levels, while demand for the latter cars will continue at an elevated level as the ethanol industry continues to expand.

May 10, 2006

Railcar Builders

For this cyclical industry, these have to be the best of times. Profits are higher that at any time in the past, even during the last car building boom of the late 1990s. Moreover, rail traffic and economic conditions favor continued demand for new railcars, although changing car type demand will favor different builders than in the past.

March 18, 2006

2006 New Railcar Construction

It has recently been reported that Economic Planning Associates (EPA) have increased their projected new railcar deliveries in 2006 to almost 74,000 cars and their 2007 forecast to almost 70,000 cars. RTF has projected a 64,000 delivery total for 2006, but concedes that its statistical models could be off by as much as 6,500 cars. However, RTF’s models show a significantly different delivery rate in 2007 than EPA has forecasted. Investing in railcars and railcar builder stocks is not for the faint hearted during such times as these. RTF has some skin in the game, so to speak, and is not thinking of changing its forecasts for a while.

January 25, 2005

Greenbrier

Greenbrier reported to the SEC that they had a multiyear order of 13,000 railcars, most of which will be doublestack intermodal units. 5,300 cars will be delivered over the next two years, with the remaining cars scheduled for delivery after 2008. Although it was not stated, the buyer is most probably the BNSF railroad, which also ordered some covered hopper and centerbeam flatcars in the package. This order will allow Greenbrier to keep its manufacturing lines from shutting down, since their backlog of past orders would have run out in late spring. 

January 23, 2006

ARI IPO

A fourth railcar builder is about to go public, increasing the percentage of railcars manufactured by public companies from 74% to 82%.  As we said last April when Freightcar America went public, the heretofore secret world of railcar supply is getting more transparent. The surge in orders mentioned in the Jan. 12 comment was evidently due to a large, multi-year order by CIT from ARI. without that order, the quarterly deliveries and orders would have been roughly balanced, with the average industry backlog remaining at about 9 months production.

January 12, 2006

4th Quarter New Car Orders, Deliveries

The ARCI announced yesterday that 26,569 railcars were ordered during the last quarter and that 17,975 cars were delivered, raising the number of backlogged orders to 69,408. Assuming there were no intermodal car orders and that most of the orders were for hopper, gondola, and tank cars, the backlogged orders at Freightcar America (RAIL) and Trinity Industries (TRN) must have risen and could possibly extend to 2007. Fortune did not smile on Greenbrier (GBX) that well.

12/30/05

Dearth of Fleet changing new designs

It has been over 10 years since the aluminum 286k coal cars were introduced, and around twenty years since the 73’ centerbeam flatcars and doublestack well cars were first built. All of these cars were fleet changers, in that all existing cars were made obsolete and fleet owners replaced most of them within the next ten years. There is no indication that another “fleet changer” is likely to soon appear, and new car orders will be driven by traffic growth and slow trains for a few more years.

11/3/05

Railcar Builders

Third quarter earnings for the publicly owned railcar builders showed continued improvement over the results of the preceding quarters. Greenbrier hit the projected $1.92 EPS for 2005 (its Fiscal year ends in August); Trinity is still expected to handily exceed the analyst projection of $1.45 and Freight Car America should easily beat their target of $3.28. As for next year, RTF expects FCA and Trinity to meet the current analyst estimates, but Greenbrier may have trouble. TTX will need more intermodal cars than are currently backlogged, but the 2006 production of this car type should come in well below 2005 levels. Unless boxcars or centerbeam flatcar orders increase, Greenbrier might not top its current performance. Trinity and Freightcar America might face similar problems in 2007, so a high PE ratio might not be justified.

10/5/05

Railcar Suppliers

It doesn’t pay to be a naysayer, especially when you’re selling advice. Does anyone remember Joe Granville? In this industry however, history can repeat itself with frightening regularity and a serious rerun of a recent event is now in the cards. Not the Tarot type of course; it is just a figure of speech. But there is an artificial demand affecting the railcar business and it is about to disappear with negative consequences for everyone, but especially those companies that are ramping up production to get a larger share or today’s market.

8/22/05

Second Quarter Performance, Railcar Builders

Second quarter earning per share for the major car builders reflected the increased production and improved margins, and analyst have increased the expected earnings per share for all the companies. RTF expects Trinity to earn significantly more than $1.35 per share for the year, and Freightcar America to have a difficult time meeting the $3.19 per share earnings projections. Most investors seem to be siding with the stock analyst, bidding up the price of RAIL to over $37 per share in recent days. All of the companies will continue to post better margins and slightly higher volumes in the coming months.

8/1/05

Second Quarter Railcar Deliveries

The results for the second quarter have been posted and the railcar builders appear to have outdone themselves. In spite of the continuing problem of cast part supplies and the problem of a wheel shortage, quarterly production has been increased to over 17,000 cars. With new orders running at about the same rate, no slowdown is likely in the next few quarters.  Trinity is slowing regaining market share, estimated to be approximately 35%, while it focuses on margin. Freightcar American and Greenbrier each appear to have around 20% of the market, with ACF (including ARI), Union Tank, and National Steel in Canada competing for the remaining 25% of the market. All of the builders are enjoying improved sales margins and these have not gone unnoticed on Wall Street. The price of Trinity’s stock is up 37% in recent weeks and Freightcar America is up over 70% from its IPO offering in April, reflecting the improvement in their per share earnings over last year. Although Greenbrier did relatively well last year compared to the other builders, its per share earnings have increased substantially. However, th+e recent new stock offering partially watered down some of these gains and there seems to be some concern whether intermodal orders will keep pace with current deliveries.

July 4, 2005

Wheel Supply

In 2003 it was a cast parts shortage (mostly truck components), in 2004 it was the cost of steel products, and in 2005 it is chapter two of the cast parts problem (this time involving wheels), that is bedeviling railcar suppliers. Anecdotal stories abound about bad ordered doublestack cars parked for want of 38” wheels and 70-ton cars being scrapped for their wheels. There are only two U.S. suppliers, Standard Steel and Griffin Wheel, but a host of foreign manufactures have been approved by the AAR to supply wheels to the US.

The shortage arose after the railroads imposed tougher change out rules for wheels with flat spots that have been tagged by wayside detectors. Hopefully, the thumping sound of wheels with flat spots will no longer be heard by trackside observers and the cost of derailments will decrease enough to offset the costs of the wheel replacements.

June 16, 2005

Railcar Prices

Railcar prices are not decreasing as the costs of steel falls. In fact, the base price quotes before the addition of scrap and steel costs surcharges have been increased. Boxcars prices still bracket $90,000, depending on the length and special features; jumbo covered hopper cars are in the mid $70k range, up from the high $60k range last year; and coal cars, as reported last April, have risen to the Mid $70k and Mid $60k range for RD hoppers and GT gons respectively.

June 6, 2005

Steel and Scrap Metal Costs

It has been reported that scrap prices for retired railcars have plummeted, as have some scrap metal prices. The Institute of Supply Management has also reported that steel prices for hot and cold rolled steel have declined 20% since last fall. Car prices however, are not budging. With line space and cast supplies still tight, who needs to cut prices to get orders, especially when demand seems to be insensitive to price. It looks like high railcar prices, and good margins for the builders, may be here for a while.

May 25, 2005

First Quarter Railcar Deliveries

The 15,000 railcar deliveries during the first quarter approximately matched the 14,800 cars delivered during the fourth quarter of 2004. However, orders for new equipment rebounded from last quarters 12,000 car book to over 17,000 cars during the first quarter. Trinity Industries (TRI) reported an 89.2% increase in railcar deliveries over the same quarter of 2004, with backlogged orders about the same as 2004, or 17,300 cars. Freightcar America (RAIL) reported a 51.5% increase in orders and a 107% increase in its backlog of 14,146 cars. Greenbrier, whose fiscal year ends in August, reported a 35% increase in deliveries between Dec. and Feb. and a 28% increase in its backlog of 12,300 cars.

May 9, 2005

Price of Coal Cars

The price of coal cars, both rotary gondola cars and rapid discharge hopper cars has risen several percent since the beginning of the year while the prices of other car types have remained more or less constant, albeit at very high amounts. During 2004, the price of coal cars did not rise as fast as the prices other car types and the recent increases could be seen as just an overdue adjustment. A possible explanation for the builder’s restraint on prices last years might be related to the recent IPO of Freightcar America. Freightcar America had almost 100% of the backlog for new coal cars at the end of the first quarter, and their main competitor stated in their annual report that they were concentrating on margin rather than market share

May 25, 2005

Railcar Builders

Based on the increase in covered hopper and coal car orders, Freightcar America (RAIL) and Trinity (TRN) should see the greatest increases in new car deliveries in 2005 as compared to their production in 2004. Freightcar America reported that they built 7,480 cars last year, representing a 16% market share, while Trinity reported that they delivered 15,100 cars for a 33% share of the new railcar market. RTF projects that Freightcar America should increase their market share to 19%, delivering over 11,000 new railcars, and that Trinity should improve their share of the new car market to 37%, with 22,000 new railcars.

April 6, 2005

Railcar Builders

Smart railcar builders try to conceal their capacity utilization rates and delivery backlogs from competitors as much as possible. This kind of proprietary information might be used against them in competitive bidding for new orders. Builders that are also public companies however, must also inform their owners how they are doing and that sometimes requires that they publish their new car delivery rates and backlogs. With Freight Car America’s IPO this week, three of the six North American car builders are public companies, accounting for over 75% of new railcar production in 2004. Hopefully, information will be more commonly available in the future for analysts who follow this industry.