American Railcar Industries Inc. (ARII, Financial) is a North American designer and manufacturer of hopper and tank railcars operating in three segments: Manufacturing, Railcar Leasing, and Railcar Services.
American Railcar dates back to the 1800’s when the Milton Car Works and 12 other railcar builders led by William Keeny Bixby of Missouri Car and Foundry formed the predecessor, the American Car and Foundry Company. It remained private until 2006, when American Railcar began trading on the Nasdaq.
Carl Icahn (Trades, Portfolio) bought his stake in the company in early 2014, purchasing 11,871,268 shares — close to 60% of American Railcar. However, after peaking at $80 a year after the initial trade, the stock has been cut in half, falling down below $38. Investors can now get in at roughly the same price as Icahn.
Performance
American Railcar Industries has a fantastic story. Financially, they came through the hard times in 2009 and 2010, when revenue dipped from $800 million to $274 million, to become much stronger financially as recent earnings announcements demonstrate.
American Railcar had Q4 EPS of $1.82 beating estimates by 22 cents, and revenue of $260.9 million (a 73.3% increase year over year) beating estimates by $49.31 million. Operating profits increased in all three businesses, with the manufacturing unit generating a majority of the gains. Through the last decade, the company has seen its earnings grow by 282% from $1.67 to $5.64 based on improved efficiency. American Railcar’s gross and operating margins have grown from single digits to 30% and 26%, directly responsible for increased earnings.
At year end, the company had a net working capital of $273 million, including $298 million of cash and cash equivalents, with strong earnings received from net proceeds of $321 million in 2015 from lease fleet financing.
Moreover, during the fourth quarter of 2015, American Railcar repurchased 167,000 shares of common stock at a cost of $6 million under the stock repurchase program for a total of 1.5 million shares of common stock.
Risk reward
The big risk here is industry wide downturns. Short sellers are already taking a seat at that table with 20% of the stock sold short. Maybe they believe revenue and earnings have peaked, or that American Railcar won’t be able to get new orders for tank cars because of the oil and gas market. Either way, they’ve been right so far. However, the company has a pretty sizable backlog of 1,450 cars to manufacture for lease and still looks to earn more than $10 per share. If earnings grow at all by 2020, and the company continues to buyback stock, investors could see a price in the $100 to $105 range. Price multiples are bound to normalize over the next few years, especially since rail will still be one of the preferred ways to transport goods for some time.
Conclusion
The company pays a $1.60 dividend (4.3% yield), it has a one-star business predictability rating from GuruFocus and a fair value of $68, good for a 48% margin of safety. Icahn owns 60% of the company, and will likely hold it since the position uses just 1.87% of his capital. If nothing else, matching Icahn’s position (1.87%) with your own portfolio would be a decent trade at these levels. You’ll receive a healthy dividend from a stock that is both on sale and owned by one of the best investors of our generation.
