Greenbrier Companies Soar: Breakouts and Highs Coming

It’s an exciting time for Greenbrier Companies New York Stock Exchange: GBX investors, even if it’s not exactly an exciting company. The company produces, markets, provides assistance and rents railway carriages. The takeaway from the second quarter results is that the business is solid and the outlook is strengthening: prospects for sustained operational quality, a return to growth and margin expansion. What this means for investors is that the low-valued stock, yielding 2.25%, is on track to continue rising into 2024 and will likely hit new long-term highs later this year.

Greenbrier Companies Exceed Expectations and Lead Higher

Greenbrier Companies reported a decent second quarter despite declining business year-over-year. The decline is mainly due to the normalization of the transportation market following the supply chain hiccups of 2021 and 2023, and the fact that a revenue shortfall is building. Net revenue of $863 million is 250 basis points better than expectations, and margin details are also solid. All operating segments were strong, with sequential growth in the primary manufacturing segment approaching 10%.

The margin is good. The company has experienced some contraction sequentially, but margin has increased compared to last year, providing slight earnings growth on the bottom line. The GAAP $1.03 is 13 cents better than the consensus reported by Marketbeat and two cents better than last year.

New orders, backlog and guidance all support the outlook for continued sequential improvement and a return to growth. New orders grew by 5,900 units and exceeded deliveries. The net increase in new orders boosted the order backlog, which stands at 29,200 units and is increasing. The backlog is sufficient to sustain operations at current levels for nearly 18 months and is within guidelines.

The company raised its forecast for fiscal year revenue and earnings to a range with a midpoint above consensus, and the forecast may be cautious due to underlying business and FOMC momentum. The timing of the FOMC’s rate cuts is questionable, but the cuts are coming, and when they do, they will accelerate economic activity. Until then, economic activity is resilient.

Greenbrier’s capital returns are safe for 2024 and 2025

Greenbrier offers a return opportunity that will appeal to income investors. The stock yields about 2.25%, trading at just 12.7 times its earnings outlook, which is favorable. The yield is just 30% of earnings, with earnings expected to grow this year and next. The balance sheet is healthy, bordering on fortress quality, with net debt amounting to 1x equity and 0.25x assets.

The company’s cash flow also allows for share repurchases, which carry a diluted average countdown of 3.7% at the end of the quarter. Since the company’s balance sheet and cash flow are unconstrained and the distribution increased last year, there is a possibility that GBX stock will increase the distribution this year as well. If so, this will likely happen at the end of the current quarter, when Q3 results are released.

Analysts guide GBX stock to new highs

Analyst sentiment towards GBX stock is changing for the better and leading the market higher. Post-release activity sees sentiment up to Hold from Reduce and price target rising. The consensus lags the market, but is up 25% in 30 days, with the most recent targets ranging from $60 to $65. A move to $60 is worth more than 1,000 basis points and puts the stock at a five-year high, on track for a new ten-year high.

Insiders pose a risk, as they own about 2.55% of the company and are selling on the rally. They are unlikely to limit gains indefinitely, but could cause volatility as the market progresses. Institutional activity offsets insider purchases and increases their ownership. Institutions own nearly 96% of the stock and are unlikely sellers due to the operating outlook, cash flow and capital returns.

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