Shares of railcar maker FreightCar America Inc. (RAIL, Financial) have almost tripled from their market-panic lows of March, but they still represent a big loss for me as I purchased the shares in 2018 when they were much higher. This past week, I crystalized that loss as the company's prospects have become much more difficult to evaluate, for me anyway.
There were two things that attracted me to this investment. The first was the massive discount to book value, which itself contained a huge net cash position. The second was the oligopolistic nature of the industry; there are very few railcar makers due to consolidation over the years.
New management took a battering ram to the first. Quarter after quarter of losses and writedowns shredded the balance sheet. Things got so bad that last week, the company made a deal for a loan that required it to issue new shares representing 23% of its shares outstanding. That was the last straw for me; while management may want to put a bunch of assets at risk to chase its newest plan, I don't.
As for the second attractive feature, I underestimated how difficult it would be for the company to catch up in efficiency to its competitors, especially when its flagship products (cars for coal) were facing decline. As a result, the downturn was much harder on FreightCar America than it was on its competitors. It was also a turnaround situation, since it needed to learn how to build cars that either weren't in its repertoire or that it was building poorly before.
It may work out just fine in the future. The company has lowered its costs by closing expensive plants and opening in Mexico. For me, it's just not worth the risk anymore, what with the margin of safety on the balance sheet having been destroyed and management showing reckless regard for it in this investor's opinion.
Disclosure: No position.
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