Greenbrier Companies

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

The Greenbrier Companies, Inc. is an international supplier of transportation equipment and services, mainly focusing on the manufacturing, leasing, and services for freight railcars.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Greenbrier operates primarily in North America, Europe, and South America, and serves a broad range of customers, including railroads, leasing companies, and shippers.

Manufacturing Segment: This segment designs and manufactures freight railcars, covering a diverse range of car types like gondola cars, covered hoppers, tank cars, boxcars, and intermodal cars. The company is particularly strong in North America and they customize their products to meet customer-specific requirements and provide engineering and design support for new models and adaptations.
Leasing & Management Services: Greenbrier leases freight railcars to railroads and other customers and offers a variety of services including fleet management, repair, and maintenance. This segment provides a recurring revenue stream that is more stable than manufacturing. The company manages a fleet of approximately 11,000 railcars.
Maintenance Services: The company provides maintenance, repair, and refurbishment services of railcars including both scheduled preventative work, and repairs on a per diem or job basis. They also offer mobile repair services.

Industry Trends & Competitive Landscape

The transportation equipment industry is highly cyclical, influenced by the broader economic environment, which in turn affects railcar demand. The industry has shown a significant increase in demand for tank cars from the energy sector and other specialized railcars that require unique technical expertise for manufacturing. While the industry is subject to economic cycles, several factors have resulted in high demand for new railcars including high commodity prices, a push for new equipment that has improved fuel efficiency, and the desire to extend equipment lives by implementing repair, modification, or refurbishment solutions. Greenbrier faces competition from other railcar manufacturers, leasing companies, and companies providing maintenance services. The key drivers of this competition are price, quality, innovation, responsiveness, and access to capital. Greenbrier differentiates itself by: - having extensive manufacturing capabilities - developing customer-specific solutions, - offering an integrated suite of products and services.

Financials In-Depth

Revenue Distribution: As of the latest 10-Q filing for the three months ended November 30, 2023, and the annual filing for the year ended August 31, 2022, most of Greenbrier’s revenue comes from Manufacturing, followed by Leasing & Management Services. Their Maintenance Services segment is still smaller than their other segments.
Margins: Greenbrier’s margins are impacted by variations in raw material prices, labor costs, and economic cycles.
Manufacturing segment has higher variability but also higher profitability, while leasing/management has lower variability but higher margin.
Per the most recent reports, the company has shown improvements in manufacturing efficiencies and has seen higher demand for specific types of railcars that have higher margins such as tank cars.
Recent Results: In the most recent quarter, Greenbrier showed a decent growth in revenue and earnings. However, earnings were slightly down due to some operating factors and adjustments and because they sold off more expensive railcars that were higher-priced because of supply chain issues, and replaced them with other new railcars which don’t have the same markup as the old ones.
Share Repurchase Program: The company has been doing significant share repurchases.

A stock repurchase program can indicate a sign of confidence on the future value of the company, particularly when shares are repurchased at higher prices. However, over-repurcahse programs can increase debt or lower the reserves to handle future financial problems.

Moat Analysis: 2 / 5

Greenbrier’s moat is relatively narrow.

Switching Costs: Customers, such as railroads, often develop long-standing relationships with their railcar suppliers and servicers, leading to some switching costs.
Scale and Scope: Greenbrier has significant scale in manufacturing that provides economies of scale and can lead to pricing advantages.
Proprietary Knowledge: The company leverages its expertise to build and maintain high-quality railcars that meet industry regulations and customer needs and can also develop complex customized products for specialized uses, which is hard for new competitors to copy These moats are reasonably strong, however, they are not insurmountable by competitors.

Moat Risks and Resilience

While Greenbrier has an established market position, the company faces several risks that could harm its competitive advantages. - The cyclical nature of the railcar industry makes it vulnerable to economic downturns. - Increasing competition can erode market share. - Changing government regulations could increase the cost of business, reduce the need for some of Greenbrier’s products, and shift competitive dynamics. - Changes in material costs can negatively affect their margins. - Supply chain issues also pose a risk for the company since they may increase costs or delay deliveries. The most recent earnings call revealed that the supply chain issues have improved, but still persist in the company’s Mexican manufacturing unit. - The company also faces cybersecurity risks to their IT systems. - Recent news reports from February 2023 reveal that Union Pacific, one of the largest railroad operators, would be cutting prices for railroads. This could cause a reduction in demand for new railcars. To provide resilience, Greenbrier should diversify its offerings to include more high-margin products, improve operational efficiencies to better manage input costs, and create flexibility in its manufacturing and maintenance procedures.

Understandability Rating: 3 / 5

The business model is fairly complex with a few moving parts such as its core business segments, their interconnected operations, and their long term relationships with their customers which can make it moderately complex to understand. Also, the company has multiple manufacturing facilities and sales operations across multiple countries, which makes it slightly more complicated to understand.

Balance Sheet Health: 3 / 5

Greenbrier’s balance sheet exhibits a mixed picture, which is why we gave it a 3/5 health rating. The company is heavily reliant on debt as a source of financing. In 2022, their debt comprised 58.5% of their total capital which is high. This is a risk for a cyclical company because debt burden is at its highest during a downturn in the business cycle. However, the company is working towards reducing their debt levels through cash flow and share repurchases. Current assets to current liabilities are a moderate 1.5, which is good, but not exceptionally high. The company has managed to maintain a net equity, despite the recent problems that had occurred within the economy, this provides confidence that the company can still generate wealth, even if their net income and profitability do not look good. It is worth mentioning that a large portion of company’s assets include goodwill and acquired intangibles, so care should be taken to make a more well-informed decision of their total equity.

In the most recent 10-Q the company has stated the following points: - The company had $650 million in cash and cash equivalents, and had an undrawn revolver capacity of $466 million. - The Company’s total debt was $1.26 billion - The company’s shareholders equity was $1.51 billion.