All-Aboard! Greenbrier Companies Breaks Out, New Highs Ahead

Key Points

• Greenbrier Companies' business is solid following the 2021-2022 supply chain log jams, and a return to growth is coming.
• Cash flow and capital returns are solid and will help sustain the rally in 2024. 
• Analysts liked the Q2 results and are raising their price targets, leading the market. 

It is an exciting time for Greenbrier Companies NYSE: GBX investors, although it isn't exactly an exciting company. The business manufactures, markets, services and leases railroad cars. The takeaway from the FQ2 results is that business is solid, and the outlook is firming: an outlook for sustained operational quality, a pivot back to growth and widening margins. What this means for investors is that the lightly-valued, 2.25% yielding stock is on track to continue rallying higher in 2024 and will likely set new long-term highs by year end. 

Greenbrier Companies Exceeds Expectations and Guides Higher

Greenbrier Companies had a decent quarter in Q2 despite the YOY decline in business. The decline is primarily due to transportation market normalization following the supply chain hiccups of 2021 and 2023, and a revenue trough is forming. The $863 million in net revenue is 250bps better than expected, and the margin details are also solid. All operating segments were strong, with sequential growth in the primary manufacturing segment approaching 10%. 

The margin is good. The company experienced some contraction sequentially, but the margin expanded compared to last year, providing a slight earnings growth on the bottom line. The GAAP $1.03 is 13 cents better than the consensus reported by Marketbeat and two cents better than last year. 

New Orders, Backlog and guidance all support the outlook for continued sequential improvement and a pivot back to growth. New orders grew by 5,900 units and outpaced deliveries. The net increase in new orders increased the backlog, which stands at 29,200 units and is rising. The backlog is enough to sustain operations at current levels for nearly 18 months and plays into the guidance. 

The company raised its guidance for FY revenue and earnings to a range with a midpoint above the consensus, and guidance may be cautious due to underlying business momentum and the FOMC. The timing of FOMC rate cuts is questionable, but cuts are coming and will accelerate economic activity when they do. Until then, economic activity is resilient. 

Greenbrier's Capital Returns Are Safe for 2024 and 2025

Greenbrier offers a value-yield opportunity that income investors will like. The stock yields about 2.25%, trading at only 12.7x its earnings outlook, which is favorable. The yield is only 30% of earnings, with earnings forecast to grow this year and next. The balance sheet is healthy, bordering on fortress quality, with net debt running at 1x equity and 0.25x assets. 

The company's cash flow also allows for share repurchases, which have the average diluted count down by 3.7% at the end of the quarter. Because the company's balance sheet and cash flow are unencumbered and it increased the distribution last year, there is a chance GBX stock will raise the distribution again this year. If so, it will likely happen at the end of the current quarter when Q3 results are released.  

Analysts Lead GBX Stock to New Highs

Analysts' sentiment in GBX stock is shifting for the better and leading the market higher. The post-release activity has the sentiment up to Hold from Reduce and the price target rising. The consensus lags behind the market but is up 25% in 30 days, with the freshest targets ranging from $60 to $65. A move to $60 is worth more than 1000bps and puts the stock at a five-year high, on track for a fresh decade high. 

The insiders are a risk, as they own about 2.55% of the company and are selling into the rally. They are unlikely to cap gains indefinitely but may cause volatility as the market advances. Institutional activity offsets the insiders' buying and has their ownership on the rise. Institutions own nearly 96% of the stock and are unlikely sellers because of the outlook for operations, cash flow and capital returns.