The Greenbrier Companies: Underappreciated or overvalued?

The Greenbrier Companies NYSE: GBX is either a deep-value dividend growth stock or an overvalued transportation play, depending on where you look. Following its Q1 results and guidance update, the stock is rocketing higher, trading well above the analysts' highest targets. However, the stock trades only 13X earnings while widening its margin and paying a solid yield. 

Value trap or not, 13X earnings for a 2.7% yield and an outlook for distribution growth is cheap and not something to pass by simply. The last increase was worth 11%, sufficient to offset inflation while paying a market-beating yield. And the distribution is reasonably healthy. The payout ratio runs below 40%, and the balance sheet is robust. The company was recently awarded the first-in-class AA rating on its debt, which isn’t great. 

The Greenbrier Companies is not without risks

To be fair, The Greenbrier Companies has no history of regular, annual distribution increases, and there have been periods with no payments. Still, distribution cuts or suspension are not in the forecast, and the past eight years have benefitted investors. Greenbrier has made numerous distribution increases in that time, raising the payout by 100%. 

Today, the company is generating sufficient capital to sustain payments and maintain the balance sheet, building a rental fleet to generate growing amounts of high-margin ARR, and has a stable outlook for earnings. The risk now is that price action will pull back within the analysts' target range, eroding capital, but that risk may not be great. 

The analyst activity has been mixed and light over the last 12 months and does not reflect the new information; the most recent was released in late October 2023 following the last report. The Q1 results reveal the operational quality of the business, providing margin improvement in the face of sequential revenue decline and cash flow to sustain dividend growth. This may entice the analysts to act. As it is, the consensus target implies a double-digit decline for the market, but will it stand? 

The Greenbrier Companies cannonballs higher on solid results

The Greenbrier Companies provided mixed results for Q1 and offered guidance that aligned with the analysts' consensus, which is all it needed to do. This is not a growth company but a well-established business in a highly visible industry that provides a clear line of sight into 2025. Although seasonal weakness led to declining sequential results, YOY growth remains present, and new orders kept the backlog over next year’s expected deliveries. Assuming the company continues to receive new orders for rail cars over the next year, its business will be solid through 2025 and potentially into 2026. 

Greenbrier reported revenue of $808.8 million, up 5.5% compared to last year. The income is weak compared to the consensus, missing by 500 basis points but offset by margin strength. The company widened the margin in its two key segments, new car production and rentals, growing the gross margin by 250 points compared to the prior quarter. Adjusted EBITDA margin was also substantial at 11.5%, delivering $0.96 in earnings or $0.23 better than expected. 

Guidance is favorable. The company expects revenue in a range bracketing the consensus and has only to execute its backlog to meet the goal. The backlog fell in Q1, but new orders of 5,000 units kept it above 29,000 or more than five quarters at the Q1 pace of delivery. Full-year deliveries are expected to run at 23,750 or about 80% of the backlog. 

The technical outlook: a bull runs into resistance

The price action in GBX stock rocketed, but the move may already be over. The market faces resistance at the post-COVID highs and may be unable to break through. The stock may return to more solid support levels in this scenario until another catalyst emerges. If the analysts don’t act now, that may not be until the next earnings report in April.