Although the railcar companies seem to have discounted the economic downturn, their recent earnings have been protected by runoff from the strong backlog accumulated during the boom times. This backlog is rapidly diminishing and won't be restored anywhere near its peak levels of 2007.

IN PICTURES: Top 10 Forex Trading Rules

Falling Volume

Freight volume, which drives demand for railcar orders, has been down sharply in 2009. The Association of American Railroads reported that railcar traffic was down 15.8% in January and February compared with the same period in 2008. Almost every category of freight was down, with coal shipments the best at a 3% decline and motor vehicles and equipment the worst, down 56.9%.

Customer Problems
Another headwind facing the industry is a possible decline in profitability in the railroad sector, one of its largest groups of customers, due to new legislation introduced in Congress. The industry says the legislation would impact its ability to set prices.

Supply Glut
The fall in freight volumes has led to a huge supply glut of unused railcars sitting around on existing track. Several towns have filed complaints with both Union Pacific (NYSE:UNP) and Burlington Northern (NYSE:BNI) over hundreds of idle cars on tracks waiting for business. (To learn the effects that excess supply has on business, check out the Demand And Supply section of our Economics Basics Tutorial.)

Orders Dropping
Total industry orders in 2009 are expected to face even steeper declines. One industry group predicts that order levels will reach that last seen in 1985, when only 9,510 orders were received.

Let's Look At Some Industry Leaders
Trinity Industries (NYSE:TRN) is the leader in manufacturing railcars, as it handled 49% of all orders received industrywide in 2008. Trinity is more diversified than its competitors with only 36% of revenues from its railcar segment and 14% from railcar leasing. This may help the company during the downturn.

FreightCar America (Nasdaq:RAIL) is still profitable due to business moving from its backlog to delivery in the quarter. The company earned 70 cents per share in the quarter. It ended 2008 with cash and equivalents of $129.2 million and no debt.

Greenbrier Companies (NYSE:GBX) is arguably the worst off of the railcar manufacturers, as the company counts General Electric (NYSE:GE) as one of its largest customers. Greenbrier reported that 11,900 cars under this contract represent 75% of its total order backlog.

American Railcar (Nasdaq:ARII) also had a strong quarter and earned 35 cents per share. It earned $1.47 per share in full-year 2008 as it shipped 7,965 cars. The company's high backlog provided support for earnings. Those days may be over, however, as 90% of its backlog is set to ship in 2009.

Aging Fleet
A strong secular trend underpins the industry in that the fleet of railcars is aging rapidly with 39% more than 25 years old. This might provide a lift to demand for railcars in the future.

Despite the industry backdrop of weak demand and railcar oversupply, not all industry participants are acting rationally. National Steelcar, a private Canadian company, is building a plant in Alabama with a capacity of 8,000 to 10,000 cars annually. The plant is being financed with a loan from the state pension fund.

Bottom Line
The stock prices of railcar manufacturers have fallen steadily with the market, but they have seen earnings protected by strong backlogs that are running down quickly. These companies may not have fully considered the coming decline in business in 2009.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center