Freight Car America Gets Derailed

It’s Not A Good Time To Buy FreightCar America, Yet 

FreightCar America (NASDAQ: RAIL) has been working hard on a transformation that is proving beneficial to the company. The problem is that Q1 results are far below expectations even with the weakly updated guidance and give little reason to own the stock. At least for now. Later, in the second half, after the reopening is fully underway things may be different. Until then this company is battling some headwinds that promise the possibility of lower share prices if not the reality. Among them are a strained balance sheet, the lack of dividends, uncertain profitability, and a high 9% short interest. 

FreightCar America Whiffs In Q1 

Despite what comes across as a very upbeat earnings report FreightCar America did not have a great Q1. Yes, the revenue of $32.37 million is up 522.5% YOY but that is against a very easy comp. The 2020 Q1 period saw its revenue fall more than 92% leaving this year’s gains far short of the two-year comp and pre-COVID levels of business. The two-year comp has revenue down 54% and it doesn’t look like business will bounce back to pre-COVID levels this year. 

“We are already seeing the early benefits of moving our manufacturing footprint to Castaños, which drove the improved year-over-year performance and resulted in our second consecutive quarter of positive gross margin,” said Jim Meyer, President and Chief Executive Officer of FreightCar America.

Moving down the report, the company operating margins shrank tremendously over the past year but there are factors that make the figures incomparable. Margins were impacted by restructuring costs and changes in the fair market value of warrants. If not for that, operating losses with have been negligible but still present. 

Looking forward, the company says business demand is picking up and at a rate above their previous forecast. To that end, management is upping the guidance for the year to a range of 1,600 to 1,750 delivered rail cars. This is up from 1,400 to 1,600 but only puts the company’s outlook in line with the consensus estimates. Considering that Q1 results missed consensus by 1500 basis points we think it will be hard for Freight Car America to match, let alone beat, this year’s consensus even with an acceleration in the back half of the year. 

Meyer added, “We are also seeing encouraging signs of momentum building across the end-markets we serve.  We expect this momentum to translate positively to FreightCar’s business with sales inquiries and new order activity proving to be stronger than we initially anticipated ... We are simply thrilled by what has been accomplished at FreightCar in the last 6 – 12 months and believe the leverage from our new operations and cost structure will serve us well in the improving market.”

The Technical Outlook: FreightCar America Pulls Back, May Head Lower 

Shares of FreightCar America are not unique in that they pulled back following the Q1 results. What is unique is that this company looks like it could go lower where so many other stocks are poised to rebound. We’re not saying this stock is going lower for sure, only that the fundamental picture does not inspire us to bullishness. In the near term, investors should be ready to see price action hit the $5 level and possibly lower. A move below the $5 would be incredibly bearish and could take the stock down to the $3 level. In that event, we would view the stock as a deep value play on long-term economic health assuming the fundamental picture gets brighter in the second half of the year.