Is It Time To Sell The Greenbrier Companies (NYSE:GBX)?

The Rally In The Greenbrier Is Over

The Greenbrier Companies (NYSE:GBX) gained about 40% since the July reporting season. What began as a short-squeeze turned into a moderately strong rally driven by the companies stability, the dividend, and the outlook for an economic rebound. Now, two quarters after the fact, the rally in Greenbrier appears to be over. Shares tanked 7.0% in early premarket action sparked by a freight-ton of bad news. The company’s fiscal Q1 results are much worse than feared and do not back up the thesis that drove shares to these lofty levels. The stock is trading at 65X its 2021 earnings on the hopes for a strong rebound in the rail-car industry that just got dashed.

The Greenbrier Companies Falls Short Of Consensus

The Greenbrier Companies was not expected to have a good quarter and it didn’t. The company reported  $402.99 million in net revenue or the lowest amount in years. The reported revenue is down 47.6% on a YOY basis, 36% sequentially, and missed the consensus by 960 basis points. The weakness in revenue carried all the way through to the bottom line leaving GAAP and adjusted EPS below expectation as well. On an adjusted basis the -$0.30 reported missed by $0.20 while GAAP eps of -$0.30 missed by $0.17.

The good news and there is good news, is that the company’s backlog and liquidity position continue to improve. The company appears focused more on cash flow than profits at this point in the pandemic but it is forecasting revenue growth and earnings leverage at some point in the future, if in an indirect way. The question that needs to be answered for investors though, is when?

“New order inquiries continue as rail traffic increases and velocity declines. This positions us well for the market improvements we expect later in calendar 2021,” says Greenbrier CEO & chairman William A. Furman.

Regarding liquidity, the company managed to increase its cash position during the quarter while paying down debt, burying back stock, and paying a dividend worth 3.0% in yield with shares trading at recent highs. The debt was reduced by $80 million bringing it down below 30% relative to total capital. The liquidity improved to $926 million including ongoing improvements and expected cost reductions and the repurchase authorization was extended another two years.

"Greenbrier remains focused on sustaining a high level of liquidity and carefully managing our manufacturing footprint in order to continue to generate operating cash flow.  Consistent with these goals, we ended the quarter with a strong cash position while meaningfully lowering our debt during the quarter. Our prior cost reduction initiatives, combined with inventory and syndication activity, produced solid cash flow in the quarter.

The Greenbrier Dividend Is At Risk

The Greenbrier Companies pays an attractive 3.0% yield but there is some risk in it. At face value, the payout is more than 200% of this year’s earnings which makes it very risky indeed. The balance sheet helps alleviate some of that concern, as do the companies back-log and outlook, but the proof is in the pudding. When the results begin to reflect a high-demand business I would feel more comfortable in the dividend stability. The company has a history of dividend increases that puts it on track for an increase next quarter but I wouldn’t hold my breath waiting for it to come.

The Technical Outlook: Greenbrier Is In Reversal

Shares of The Greenbrier Companies fell -7.0% in the early premarket action confirming a top at the $37.50 level and a probable reversal in price action. The caveat for investors is that a reversal may mean a switch from up to sideways and not up to down as is so easy to assume. If buyers step in to support the stock at today’s lows a move to sideways is the most likely scenario. If not then a much deeper move lower may be on the way.