Recently, two U.S. senators wrote to the Surface Transportation Board to examine the reasons for railway shipment delays to auto dealerships. These delays in auto deliveries have cost the industry large sums of money. This is because they resulted in millions of dollars in costs related to transport, storage fees and vehicle shortages at dealerships.
Automakers Hurt By Logistics
In their letter, the senators, who are co-chairmen of the Senate Auto Caucus, indicated that this issue was first raised in April by the Alliance of Automobile Manufacturers. This group, which represents the likes of General Motors Co. (GM), Ford Motor Co. (F) and Toyota Motor Corp. (TM), had written to the Board, asking it to help resolve the delays of vehicles whose cost runs into billions of dollars.
The trade group had mentioned that automakers transport 70% of their vehicles using the railways. Around $5 billion is spent on freight rail charges annually by the auto industry. The industry group had said it was aware “that winter weather often results in seasonal rail service delays and that this winter was particularly severe.” However, the response to these conditions had been far from satisfactory, they said.
Railcar Shortages
More significantly, the letter sent in April said that while services were improving, the industry as a whole was short of 1,000 railcars a day needed to transport cars. “By far, the greatest logistics problem faced by auto manufacturers is the carriers’ failure to provide a sufficient supply of empty railcars to transport finished vehicles,” the group said.
Another reason for the inadequacy in logistics was the increase in automobile production as the industry undergoes a recovery, the senators said. They also mentioned that the rise in railroad crude shipments was a major cause for the problem.
Oil Payload Rises
According to the Association of American Railroads, in 2013 more than 400,000 carloads of crude oil were transported by U.S. railroads. This is a massive increase from the 9,500 transported in 2008. The load had increased even further in 2014.
The reason for this jump in rail shipments is the increase in crude transported from Montana, North Dakota and Canada. Output from the Bakken shale formation has increased by nearly 40%. This has resulted in the recurrent image of “unit” trains passing through several states often consisting of 100 tank cars or more. In a sense, they have almost become moving pipelines.
However, recent derailments may soon necessitate the introduction of a newer type of tank car. The National Transportation Safety Board has said that existing types of tank cars were "susceptible to damage and catastrophic loss of hazardous material" in the event of a derailment.
A report from the Energy and National Security Program at the Center for Strategic and International Studies has said that if the voluntary railroad industry standard was accepted, 66,000 cars would have to be replaced or modified. The Canadian government has enacted new safety standards for tank cars and U.S. regulators will probably also do so.
Our Choices
The growth in the automobile and oil industries indicates that the demand for railcars will rise, providing impetus to this sector. Below we present three stocks which possess the potential to grow appreciably in this environment, each of which also has a good Zacks rank.
The Greenbrier Companies, Inc. (GBX) designs, manufactures and markets railroad freight car equipment in North America and Europe. It also manufactures marine barges in North America. Greenbrier undertakes railcar refurbishment, provides wheel services and parts as well as other services.
The company has three business segments: manufacturing, wheel services, refurbishment & parts, and leasing & services. On July 2, Greenbrier announced third quarter earnings of $1.03 per share, beating the Zacks Consensus Estimate of 74 cents per share.
Greenbrier holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 53.40%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 21.50.
Trinity Industries Inc. (TRN) produces and sells a wide range of products across several product lines, including railcars and railcar parts. Trinity also leases railcars to its customers using its integrated business model. This includes its leasing business Trinity Industries Leasing Company (TILC). TILC is a leading provider of comprehensive rail services in North America. These services include railcar leasing, administration and management.
The company has five segments: rail group, railcar leasing and management services, construction products, inland barge group, and energy equipment group. Currently the company holds a Zacks Rank #2 (Buy) and has expected earnings growth of 60.90%. It has a P/E (F1) of 11.90.
American Railcar Industries, Inc. (ARII) is a leading North American manufacturer of covered hopper and tank railcars. ARI also repairs and refurbishes railcars and provides fleet management services. It also designs and manufactures railcar and industrial components.
The company operates through two segments: railcar services and manufacturing operations. Its railcar services include railcar refurbishment, repair, fleet management and engineering services. Apart from a Zacks Rank #3 (Hold), American Railcar has expected earnings growth of 6.30%. It has a P/E (F1) of 14.53.
The increase in activity from the oil and automobile industries is indicative of a broader recovery. One could even say that an increase in railcar demand is a reliable indicator of overall economic growth. This is why these stocks would make good additions to your portfolio.
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