Rail Baron

Freightcar America (RAIL) – I could not resist the title. Rail Baron (Rail Baron Fanatics) is one of the great board games of all time. Kind of like Monopoly with railroad lines…but better. Has anyone noticed that corporate America has gotten a sense of humor when picking stock symbols? It is almost a marketing tool. Sealy is ZZ (ha-ha). Genetech is DNA. Taco Bell is YUM. Ok, ok, enough irrelevant chatter! On with the analysis!

I already like the name and concept before researching any further. Remember how FDG complained about increasing transportation costs? That means trains for a coal company. Norfolk Southern, Burlington Northern, Union Pacific (all great names from my Rail Baron game) are all seeing their businesses boom. They are flush with cash. I think people may be switching from trucks to trains as they’re more fuel-efficient. If ethanol takes off, trains will be needed to ship the grains to the refineries. Hey, I am starting sound like Cramer.

Not many surprises in reading their profile. They build rail cars. They are the GM (wait bad analogy, let us say Boeing) of the train industry. The one surprise (to me) was they’ve been around since 1901. Move over GM and BA!

Key Facts

• Revenues up in 1st quarter 2006 76% Y o Y!
• Orders for new railcars were 1,031 vs. 5,035 made in 1q 2005.
• Backlog is 17,794 vs. 14,146 at 1q 2005 (26% increase).
• Stock price is $63.12 with a 52-week range of $18.17 to $78.34
• Market cap is $793m
• Current Ratio of 1.576 with virtually no long-term debt.
• Earning Yield (per MFI): 14%
  
• ROC (per MFI): > 100%
  

I gotta believe this is a market with high barriers to entry. I am not even sure whether foreign competitors can play. The CEO did state that, “orders can be uneven (explaining the orders in 1st quarter) and that business outlook was strong”. RAIL seems to have a very strong balance sheet.

It all seems so good. Why is the short ratio 9%? How come they were so cheap within the past year? Could they drop back down to those levels? Can customers change their minds or do they pay in advance? How long does it take to build Rail Cars? How many are built in a quarter (what does their backlog represent)? What if the economy cools, will this cool super fast? How many questions can I ask? Do these questions really add anything?

All of this analysis thus far does make me wonder whether it is relevant. For instance I have focused on the current ratio on several stocks. Is it relevant? If it is, would JG not have included it in his MFI? Am I looking at it just because I do not like to be in debt? JG does argue that Accounts Payable are essentially an interest free loan. And Long Term debt is not necessarily bad if the interest rate is reasonable and the debt allows you to expand and make more money. At least I hope this isn't too relevant as the analysis made me look back at my earlier MFI stocks and several of them (like HW) are in serious debt. Oh well.

That 76% increase in revenues is eye-popping. I think RAIL needs to be on my short list with OVTI. KSWS and ASEI also merit watching so far.