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.
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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%.
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.
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.)
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.
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.
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.