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Jelly Roll Capital Equity Research |
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Market Analysis, Education, and Wall Street-Quality Stock Reports |
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FreightCar America (RAIL) |
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Selected Analyst Coverage (Target): Ford Equity Research (BIR) — Hold |
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RAIL Closed at $51.47 on 7-12-07 |
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Released 7-13-07 |
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Freightcar America (ticker: RAIL) is a leading manufacturer and seller of coal-carrying freight cars, as well as services related to the freight car business. · FreightCar America operates in a cyclical business that is largely dependent on inconsistent orders, however, the last several years have seen a surge in demand and the company has greatly benefited from its market share (approximately 80%) in the coal-carrying car market. While an impending slowdown looms, the thesis here is that the market has oversold RAIL, which now trades for 2x trailing EBITDA, and since the future seems bright for coal as a power source, RAIL is a play on meeting that demand. · In an attempt to diversify some risk, company management has been in the process of adding additional product offerings to the company’s current line. Any additional revenues that can be made from new products should not only serve to soften the cyclicality, but also allow the company to command a higher multiple as investors see the company as carrying less risk. · The company has the ability to generate large amounts of cash quickly with its business model, which requires only limited capital expenditures. Current cash on the balance sheet amounts to about $15/share, or 30% of the company’s market value. Additionally, the most recent quarter saw a jump in receivables that negatively impacted the bottom line of free cash flow, however, this appears to be a temporary phenomenon and the conversion of those receivables should bolster the balance sheet with another $5/share of cash for a total of $20/share, or 40% of the share price in cash. The company is in the middle of a share buyback, which will use some of the available cash. · RAIL has been ranked as one of market’s best stocks according to the quantitative model used heavily to screen stocks at this site. Stocks in its position typically return upwards of 20% per year on average, yet RAIL shares have lagged and are currently near the middle of their 52-week range. · In addition to a 21% short interest that could translate to rapid gains on covering, RAIL has been accumulated by two of the world’s top hedge funds: Ken Griffin’s Citadel, and Steve Cohen’s SAC Capital. The involvement of these two funds should be seen as a testament to RAIL’s upside potential; Griffin and Cohen did not becoming leading hedge fund managers by picking mediocre investments. With mutual fund managers having net sells in the last quarter of over 1 million shares (9% of holdings), some of the negative momentum has also been unwound. · Given FreightCar America’s anticipated earnings growth, its balance sheet position, cash flows, and business risk, the fair value target for RAIL is $60.25, putting RAIL shares as being undervalued by approximately 17% based off Thursday’s closing price of $51.47.
Disclosure: The analyst has no position in RAIL or its derivatives. |
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