Tryaging
The following segment was excerpted from this fund letter.
Greenbrier Companies Inc (NYSE:GBX)
Today, the Greenbrier thesis is slightly different from what it was before the review with increased conviction around a couple of points. For practitioners, the Greenbriar thesis is two fold, over the next couple of years, the company has significant tailwinds to operationally revert. Secondly, the company is using its excess cash flow to invest in a structurally advantageous leasing fleet that will improve the regularity of its outyear cash flows. In many ways, the company is doing an as-a-service conversion in the industrial sector, building a low-risk, secured, better yielding, commercial bank operation while also being one of two large-scale suppliers of railcars to the railroad and shipping industry. In three years, the company should generate more free cash flow at a higher return on invested capital and with much increased regularity.
Having endured a significant decline, meant that the First Principles review for Greenbrier Companies, Inc needed to more expressly confirm each of those points or prove another thesis altogether to remain in the portfolio. It resulted in increased conviction based on three points.
- Demand is solid. Currently, few railcars are in storage, and the ones that are in the words of one expert, “are for a reason”. Railcars are 40-50 year assets, the oldest of which date back to the deregulation of the railroad industry. Current demand for this year and forecasted demand for the next 3 years, is entirely replacement demand for cars reaching the end of life. Even taking into account that each railcar’s capacity has grown by 15% and therefore can shrink count by the same, the next 3 years of demand, only replacing those that are aging out, is likely to result in compounded year over year growth. In 2023, aided by the Freight Railcar Act of 2022, backlogs are likely to fill, providing for plannable and fillable demand. Because two large players dominate the industry, and demand is unfulfillable in the near term by the industry at large, evidence that textbook Cournot pricing dynamics – which allows firms to maximize profit – are occurring. Current forecasts do not include any benefit from US reshoring manufacturing broadly nor do they account for railroads taking share from trucking. They do account for increased operational efficiency by the railroad companies (resulting in needing fewer cars). Should either of the positive developments occur, another leg of growth in the outyears is likely to occur and should railroad service levels continue to struggle – that would prove a mild positive to demand.
- Greenbrier’s leasing operation is best in class and the foundations were built by the same person who previously built the other best in class leasing operation. Greenbrier began its leasing operation in 2021 by partnering with Longwood Group, run by Stephen Menzies, the former President of Trinity’s (TRN) railcar leasing group. Greenbrier’s fleet has similar best in class operating metrics to Trinity’s, a similarly advantageous operation with first priority on Greenbrier’s output and a broad repair shop presence, and best in class leasing rates and usage.
- Margins should increase significantly. During 2022 Greenbriar relocated significant manufacturing capability to Monclova, Mexico – near Trinity and other railroad supply companies. For Greenbrier, whose margins are significantly inferior to its larger competitor, this is a positive, as it allows for operational expertise to mingle more freely.
With demand almost irreversibly strong, line of sight to stable recurring cash flows, potential margin expansion in the manufacturing business, and European operations closer to being back on their feet, the missing piece is actual execution. This has not yet occurred. Typically, when a company is in an opportunity rich position, as Greenbrier’s is, an able management team begins to manifest positive developments for the company and therefore the stock, before or while the operational outcomes are occurring. The Company has to execute, and should it, the stock should prove to exceed White Brook’s hurdle for continued investment. If execution continues to falter, while I imagine it would be a ripe candidate for activism, White Brook’s investment will be reconsidered.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
