As many of our followers know we have traded The Greenbrier Companies, Inc. (NYSE:GBX) stock dozens of times. We recently began buying again a few weeks ago and see this as a fantastic swing trading stock. As an investment, it has been seriously painful. Dividends have helped, but, the stock really seems to trade in a predictable range over the years. Right now, we are coming into a period where we are toward the bottom of the range. Much of what is happening is being driven by the macro environment. The VIX is now over 33 here folks. We are getting to panic levels. Not quite full capitulation but today is a good sign of capitulation starting as major opening gains were wiped out. It seems people had losses and losses, and took the first green bump to sell for “slightly” less of a loss. Our firm stands by a bottom being made in October and a rally into year end. Earnings will be key. If they do not come down all that much, very good sign. Make no mistake, the market is down due to the Federal Reserve’s relentless battle to reduce rampant inflation. As a side effect of inflation we are seeing slowing consumer confidence, and rising interest rates. The latter is hurting demand, in the hopes it will lower prices, and eventually drive up some unemployment. This is well-known. Equities in the United States have largely priced in a recession.
The future is uncertain. Fed has raised rates to slow the economy to get inflation under control. That said, rail data remains strong. Transportation of goods and supply chain issues were rampant in 2021, and those have largely improved, now everything just costs more. Logistics to move goods by truck and rail had become an issue, but that has improved. For Greenbrier, the company is still in a good position, despite the fear the market is pricing in. Headwinds like labor and material costs persist, but demand remains strong.
The stock of Greenbrier has fallen 45% and is at a level that we want to buy most heavily at $25. The recently reported fiscal Q3 earnings showed some signs of weakness, but there was still a lot to like. The Fed may not like it but the economy is still humming right along. The Fed is doing what it can to slow things down, but this market is pricing equities like the economy is going to crash, not just slow down. We suspect this is a mispricing.
The Q3 results started this selloff
The real selloff began to ramp up in the summer following Q3 results that were had some good and bad data points. Frankly top line revenues were pretty solid, but with high expenses and crimped margins the company disappointed on the bottom line. Cue the selling that has continued up until now. Weeks and weeks of selling. The top line exceed our expectations reflecting efforts to have more operational efficiency. Q3 revenues jumped year-over-year much more than expected. We knew they would increase and were more bullish than consensus in our expectations based on the trends year-to-date, along with the known backlog, and management’s efficiency plans. Revenues were up 76% from last year to $793 million, well above our expectations for $750 million. The top line was also well above consensus expectations, by $57.4 million. A lot of this was driven by a strong book-to-bill once again, and some refurbishment orders. However, earnings came up short.
Earnings power was less than consensus and largely were a result of margins. Oddly, gross margins improved from the sequential second quarter. Gross margin overall was just 9.6% in Q3, up from 8.0% in Q2. This was a result of higher deliveries and improved efficiencies, and that is welcomed. Though, the segment specific margins offer more clues. Gross margin was 6.1% in the manufacturing segment. There were also more deliveries and better pricing, and operating margin was up to 8.5%. This was strong, but we actually were expecting 8-10% margins, which some Ukraine issues weighed on so we were below the midpoint here. Margins rose 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 rose to 8.5% up from 3.3%. There was more volumes helping here. We continue to see strong volume. But would love to see even more margin expansion as these margins are historically quite low. In the leasing and management services margins fell badly to 64% from 72%, while revenue was up slightly. Operating margin was down to 46.7%.
The company reported earnings of $3.1 million or $0.09 per share. Expenses to improve the business also have cost the company as capex expands. The company is laying the foundation for future growth, but there are a lot of cost pressures. Of course we have inflationary pressures and labor shortages are leading to higher labor costs per employee. However, buying here, at these lows, you are accessing a multi-billion dollar backlog and a stock offering a 4.2% dividend yield. Despite the market panicking, the company continues to see strong orders and has a diversified backlog.
While we will get an update in a few more weeks when the company reports fiscal Q4, as of now, demand remains strong. Railcar manufacturing is up and leasing is strong. Manufacturing revenues are doing well and in North America there are big orders being placed. The stock action is not reflecting the operations, it is reflecting what could happen in a bad recession. We just are not there. New orders in the quarter totaled 5,000 units valued at $670 million, which is strong. On top of this, deliveries were 5,200 in Q3. The backlog is strong and is a critical indicator of future cash flow generation and earnings potential. In Q3, new railcar backlog was 30,900 units with a value of $3.6 billion. This is up substantially from the start of the year.
There have been a few more developments. The company recently announced a new $150 million term loan. This one matures in July 2027 and has terms (favorable) similar to Greenbrier Leasing’s term loan completed in August 2021. The loan will be used to finance expansion of the leasing fleet. Now we know you are thinking rates might kill them, but interest rates on Greenbrier’s long-term debt are fixed at attractive levels, with no material debt maturities until 2026.
Another development is the company elected Admiral Thomas B. Fargo as Chair of its Board of Directors recently. He is replacing William A. Furman, Greenbrier Executive Chair since March 2022. Recall Furman was also the former CEO. This new change brings a different voice to the helm of the board room and could mean different policies related to increasing dividends or funding buybacks. Change is good.
We will be awaiting commentary on Q4 which will be out in a few weeks. Despite the horrible stock market, it has been a good fiscal 2022 for the company. The real headwinds have been labor shortages and inflationary input costs. After Q3 management has increased its forecast for the year, with “deliveries [that] will be 18,500 – 19,500 units. “Given our expectations and managements guide we see revenues of $2.7-$2.8 billion, with slightly reduced margins versus last year. Overall we are looking for EPS of $1.85-2.25. This puts the stock at about 12X FWD EPS at the mid point, which is good value. The company still is paying a solid dividend which is now yielding 4.2%. We like that income while we wait for a turnaround.
The stock has been crushed. The market has been crushed. We think you buy low. The price is right. We may not ever time a bottom, but all things considered, we want to own this quality company here.