Greenbrier Companies Stock Enters Buy Zone – Opportunity Knocks

Key Points

• The Greenbrier Companies struggled in Q3 but maintained guidance and expects growth to resume soon.
• The capital returns are solid, including a 2.5% yield and share repurchases. 
• The 10% price correction is a knee-jerk reaction to tepid news and creates a buying opportunity. 

The Greenbrier Companies NYSE: GBX stock is returning to the buy zone. The business is boring, and the Q3 release is uninspiring, but neither are reasons for income investors to shed the stock. The results certainly aren’t reasons for its price to drop more than 10%, which is why the stock price correction in GBX is a good buying opportunity to load up on more shares.

While tepid, the Q3 results reveal industry normalization following the supply-chain logjams of 2021 and 2022 and a business shift that drives margin improvement.  The results also come with positive guidance that includes a return to growth for this transportation stock. 

Because the company makes money, pays a market-beating dividend, and repurchases shares, its stock price should rebound soon. Because the company is returning to growth with record-setting margins, the stock price should be able to sustain a rally and increase to a multi-year high by mid-2025. 

The Greenbrier Companies Widens Margin in Tough Environment

Greenbrier struggled in Q3, with revenue contracting by 22% compared to last year, and missed the consensus by more than 1000 basis points. The weakness is primarily due to normalizing rail traffic and the timing of shipments, which are offset to a degree by the growing rental business. The new car and maintenance services segments declined, but the rental business is booming. The company added 600 cars to its fleet, an increase of 4%, to drive a 25% increase in segment revenue and maintained a near-100% utilization rate. This is important because the rental fleet generates recurring revenue and is a high-margin business. 

Margin news is favorable. The company widened its gross margin by 280 bps YoY to near-record levels. The margin improvement carried through to the bottom line and generated the highest EBITDA and GAAP earnings for more than four years. However, the results failed to impress the market. The earnings were weaker than expected and helped lower the stock price despite the 65% YoY increase.

Guidance suggests a stock price rebound will come soon. The guidance was as expected, with revenue and earnings bracketing the consensus forecast reported by MarketBeat, which is no catalyst for a rally. However, the guidance assumes shipments will improve over the quarter, the full-year outlook was reiterated, and CEO commentary is positive. Ms. Tekorius expects sequential revenue growth in Q4; the market forecasts business growth to continue in F2025 and for YoY growth in the back half of the year. 

The Greenbrier Companies' Capital Return is Safe in 2024

The Greenbrier Company struggled in Q3, but profitability improved, helping sustain balance sheet health and capital returns. While cash decreased, assets and equity improved, providing leverage for revenue and shareholder value. Capital returns include dividends and share repurchases. Share repurchases reduced the count by an average of 4.6% in Q3 and are expected to continue. 

The dividend and valuation make GBX a deep-value/high-yield company compared to the S&P 500. The dividend is worth $1.20 annually or about 2.5%, double the broad market average. Shares are trading near 11x earnings or about half the value of the average S&P 500 company. 

The Greenbrier Companies Sets Up for a Trend-Following Signal

The Greenbrier Companies stock is in a correction but has not broken the trend. The trend was set in 2023 by the institutional investing community, a buyer of this stock. The institutions have bought on balance for five consecutive quarters, helping to lift the market to the high end of a trading range, and will likely support the price now. The risk is that support at the long-term EMA will fail, in which case this stock could pull back to $35 or lower.