Rail Leasing And European Rationalization Will Sustain Momentum Amid Headwinds

Key Takeaways

• Strategic efficiency improvements and cost reductions are set to boost net margins and earnings in a tough railcar market.
  
• Strong leasing market performance and a significant global railcar backlog support stable revenue and future growth prospects.
  
• Fluctuating trade policies and slower orders could pressure margins and reduce revenue amidst European production challenges.

Catalysts

Designs, manufactures, and markets railroad freight car equipment in North America, Europe, and South America.

• Greenbrier's strategic focus on improving operating efficiency and reducing costs is expected to drive higher net margins and earnings, even while facing a challenging railcar market.
  
• The continued investment in capacity rationalization and facility optimization, as seen with the rationalization in Europe, could lead to long-term cost reductions and improved competitive positioning, positively impacting net margins and operating income.
  
• Strength in the leasing market, with recurring revenue growing by 39% over the last two years, along with strong lease renewal rates and limited equipment supply, is likely to contribute to stable and possibly increasing revenue.
  
• Greenbrier's robust global railcar backlog, valued at $2.6 billion, provides significant revenue visibility and is expected to support steady production rates, positively impacting future revenue streams.
  
• Market conditions, such as aging North American fleet and demand growth in Europe and Brazil due to infrastructure investments and policy changes, are likely to boost demand for railcar maintenance and new builds, potentially increasing revenue and operating margins.

Greenbrier Companies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Greenbrier Companies's revenue will decrease by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.8% today to 2.9% in 3 years time.
• Analysts expect earnings to reach $78.3 million (and earnings per share of $3.17) by about May 2028, down from $202.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.1x on those 2028 earnings, up from 6.6x today. This future PE is greater than the current PE for the US Machinery industry at 21.3x.
• Analysts expect the number of shares outstanding to grow by 0.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

Greenbrier Companies Future Earnings Per Share Growth

Risks

• Fluctuating trade policies and tariffs impact input costs, mainly steel, which could pressure gross margins and affect net earnings.
  
• Decreasing deliveries and production adjustments, influenced by demand shifts and European rationalization, may reduce revenue in the near term.
  
• A slower rate of new orders, attributed to customer hesitance due to policy uncertainties, could lead to decreased future revenue.
  
• Facility rationalization in Europe, resulting in reduced deliveries, signifies existing challenges in the region that might constrain revenue and margins.
  
• Challenges in the secondary market, including uncertainties around syndication timing, could affect predictable cash flow and earnings from leasing activities.

Valuation

• The analysts have a consensus price target of $49.0 for Greenbrier Companies based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.7 billion, earnings will come to $78.3 million, and it would be trading on a PE ratio of 25.1x, assuming you use a discount rate of 7.8%.
• Given the current share price of $42.56, the analyst price target of $49.0 is 13.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.