ALL ABOARD THE VALUE TRAIN: WHY $RAIL MIGHT BE HEADED NORTH - FREIGHTCAR AMERICA - Long term price target of $25

Long term price target of $25

Originally published on 3/31/25 in The Millegan Memo

https://www.woodworth.fund/news/the-millegan-memo-march-2025

ALL ABOARD THE VALUE TRAIN: WHY $RAIL MIGHT BE HEADED NORTH - FREIGHTCAR AMERICA

Freightcar America continues to deliver on operational results. Freightcar America, which despite the name has no actual manufacturing operations in the US, reported its four quarter and full year 2024 earnings results earlier this March.  Freightcar recently completed expansion and capital investment into its railcar manufacturing facility at Castaños in northern Mexico.  With a capacity for around 5,000 units per year and potential capacity of upwards of 6,000 if the situation demanded it, and being located physically close to steel plants that provide the facility with low-cost raw materials in addition to lower-cost Mexican labor, Railcar has positioned itself as a behemoth in the North American railcar sector, but not without taking some substantial risk along the way.  Freightcar began the journey to its current facility after winding down its operations in the US back in 2021, and spent several years with next to no revenues as it built a funding bridge out of a combination of equity, warrants, and creative financing from funds and individuals to get the Castaños facility fully built.  Now that the facility is finished, the company is operationally profitable with healthy 15.3% gross margins, and begins the process of fully cleaning up its balance sheet of various equity instruments and refinancing of higher-interest notes and debt into longer-term dollar-denominated facilities.  For instance, the company just announced the opening of a $35 million line of credit through Bank of America, in addition to refinancing its preferred shares, along with a non-dilutive cashless exercise of outstanding warrants held by PIMCO.

Competitive among manufacturers and insensitive to tariffs. Despite growing tariff charges levied on US importers by the Trump administration, rail cars are relatively insensitive to foreign import sales taxes.  The US itself, though it is a large market, also only has freight car producers with capacity numbering in the hundreds per year compared to RAIL’s production of thousands, and what capacity exists domestically in the US is typically high-cost and primarily concentrated in specialty orders.  This should mean that tariffs as they currently exist will have negligible short-run impacts on freight car orders for Mexican-produced stock.  In addition to this, the US market is highly dependent on its overland rail cargo network and cannot simply stop buying railcars, even in the event of a slowdown, meaning that the company already has gained and expects to continue to gain market share from competing manufacturers, who are mostly also located in Mexico.  Finally, freight car manufacturers act as a sort of middleman in the land-based rail cargo shipping industry, meaning that their profit margins are largely dependent on overall freight car consumption volumes, with the railroads that consume the cars tending to bear the higher end costs of tariffs, which they then pass on to their customers.  In the past, freight car orders have remained relatively reliable even in cases where the actual materials being shipped by the railroads, such as steel and coal, have fluctuated wildly in price, in part due to the proportion of orders driven by predictable rail car replacement schedules.

Coupled with general capital flight to safety in the market, Freightcar America’s pricing has been affected by confusing messaging resulting from non-cash liabilities still present on the books from their long term transition and ramp up to Mexican production. What remains clear is that, not only are they the lowest cost producer, but they are eating market share from their competitors with additional capacity available on-demand. With their operational ramp-up in capex now over, the company consistently operationally profitable, and the company clearing their balance sheet of non-cash warrant liabilities from PIMCO coming off the books, we expect the balance sheet outlook to become much simplified in coming quarters. In our view based on our rigorous fundamental and technical analysis, this stock, currently trading around $5.53, is easily a $30-40 stock long term with the risks of transition having virtually evaporated. Needless to say - RAIL would seem to be a gem thrown out with the trash during this period of negative market sentiment.

Please note that the Woodworth Contrarian Stock & Bond Fund, LP, of which the Millegan Brothers manage and are invested in, currently holds a position of RAIL as of the publication date of this article.