A 3% Dividend Yield Offered at a Ridiculously Cheap Price

Investors crave linearity more than anything. A stock chart that reveals a persistent upward price trajectory is as irrepressible to investors as Halloween candy is to a 5-year-old.
I’m rarely drawn to such investment eye candy. I’ve loitered on this earth long enough to know that life rarely persists in one direction for long, and never in perpetuity. After all, it’s called the business cycle, not the business trend, for a reason. All businesses go through cycles.
Having contrarian inclinations, I frequently seek value in businesses cycling down. You can slot Greenbrier Companies (NYSE: GBX) into the downcycle category.
Greenbrier is a leading railcar manufacturer, with 30% of the U.S. railcar market. It’s also a leading equipment-services provider to all the major railroads. On the side, it manufactures and markets ocean-going marine barges.
This time last year, Greenbrier shares were trading just above $60. Today, they trade just above $26. Investor perception of Greenbrier has changed over the past 12 months, and obviously not for the better.
Perception, though, frequently fails to jibe with reality. Yes, it’s true: Rail traffic is down for all things commodity and energy related. It’s also untrue that poor prospects and losses loom.
Last month, Greenbrier reported second-quarter financial results. The numbers were respectable. Earnings posted at $1.41 per share on $669.1 million of revenue. The former was down year-over-year; the latter was up.
Greenbrier’s business has slowed. It recorded 3,000 new railcar orders valued at $310 million last quarter. That’s a 70% decline from the year-ago quarter. Management also trimmed delivery estimates for the year to 20,000-22,000 railcars, reducing the top-end estimate by 500.
It’s not all that bad, though.
For one, Greenbrier still makes money. Earnings per share over the past 12 months totaled $6.89. At the current market price that means Greenbrier shares trade at a mere four times trailing 12-month earnings.
Of course, investment value is determined by what you will do for me, not by what you’ve done for me. According to management, Greenbrier should do a lot.
Management guided for EPS to fall between $5.65 and $6.15 this year (the fiscal year ends in August). If EPS tilts toward the high end, Greenbrier could earn more this year than it did in fiscal year 2015, when EPS posted at $5.93. But even if EPS tilts toward the low end, you’re looking at a stock trading at less than five times expected 2016 expected earnings.
The domestic business might be trending down, but the international business is trending up.
Greenbrier experienced a large increase in deferred revenue during the last quarter due to advanced payments to build railcars for Saudi Arabia. Greenbrier will begin delivering these railcars later this year.
In our hemisphere, Greenbrier owns a 20% stake in AmstedMaxion Hortolandia, which delivers 70% of new railcars manufactured in South America. Like so much in South America, railcars are decrepit and in need of replacement. Nearly 60% of railcars in South America are 30 years or older. Future orders will remain brisk.
A normalized North America market is 50,000 annual railcar deliveries. Greenbrier’s cumulative international deliveries could be 40% to 60% of normalized North America deliveries. In other words, international growth opportunities are substantial.
The potential for share-price appreciation is also substantial. Over the past five years, Greenbrier’s trailing price-earnings multiple has ranged between 7 and 72. If we apply a 7 multiple to the low end of this year’s EPS estimate, we’re looking at significant share-price appreciation.
In the meantime, we can buy Greenbrier’s $0.80-per-share dividend, which yields 3%, at less than four times trailing 12-month earnings. That’s cheap.
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