What Do Expectations Tell Us About American Railcar Industries Inc’s (NASDAQ:ARII) Margins In The Next Few Years?

American Railcar Industries’s negative outlook for net income drives analysts to project a meaningful decline of -65.31% over the next year, but it’s necessary to take a moment and consider this expectation. It is crucial for investors to do this, so they can judge the underlying components responsible for pushing this decrease, as the return realised by shareholders may look different in the future if underlying assumptions are not realised. To help investors get a top level understanding, I will shine a light on the behaviour of American Railcar Industries’s margins so investors can evaluate the revenue and cost drivers behind future earnings projections and understand how they may impact on returns compared to the industry.

Check out our latest analysis for American Railcar Industries

What can we tell from ARII’s profit margin?

In general, the value that accrues to equity holders is partly reliant on the ability of a company to convert sales revenue in to earnings. Knowing the portion of top line revenue that is turned into net income helps to assess this ability whilst spotting profit drivers, and can be found by calculating ARII’s profit margin.

American Railcar Industries’s margin has expanded in the past five years, as a result of average net income growth of 17.59% exceeding average revenue growth of 1.57%, which suggests that the company has been able to convert a larger percentage of revenue into net income whilst grow their top line at the same time. ARII’s most recent margin of 29.82% appears to follow this trend, which could imply improved cost efficiency as well as increasing revenue contributed to the previous earnings growth.

Using American Railcar Industries’s margin expectations as a way to understand projections for the future

Margins are expected to transition into contraction, with annual revenue growth tipped at 7.29% and earnings expected to fall at -53.17% on an annual basis. This suggests the previous earnings growth is expected to reverse due to an increase in costs rather than a dramatic fall in revenue potential. This is causing negative net income growth, whilst revenue growth remains positive, resulting in the expectation for margins to contract. However, investors should realise a contracting margin can hold various implications on the company’s performance depending on how it operates, which makes further research very important.

In many situations, looking at a company’s profit margin in relation to other similar businesses can be more informative. In American Railcar Industries’s case, profit margins moving forward are forecasted to contract as the margins in the Machinery industry expand, and at the same time, ARII’s projected ROE of 7.50% is less than the 11.71% expected ROE for the rest of industry. This highlights that analysts believe the underlying earnings characteristics mentioned above will provide a lower return for shareholders in relation to the industry. However, margins use items on the income statement that are prone to being manipulated by various accounting measures, which can distort our analysis. Thus, it is essential to run your own analysis on American Railcar Industries’s future expectations whilst maintaining a watchful eye over cost behaviour, because if the business is able to maintain their revenue trajectory, there may be an opportunity to return to positive earnings growth and attractive returns.

Next Steps:

For ARII, I’ve put together three fundamental aspects you should look at:

1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Valuation: What is ARII worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ARII is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of ARII? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!