Wednesday, April 6, 2011

Global Railway: A Transformed Company

Global Railway Industries (GBI) provides locomotive re-manufacture services to the railway industry. The company trades for just $20 million despite $12 million in cash, no debt and a history of profitability.

Rail traffic nosedived during the recession, causing overcapacity in the industry that reduced the need for the types of services Global Railway offers. But while the company lost $4.3 million in 2010 (excluding the gain from the sale), it did manage to earn $3.3 million in 2007. Because the market focuses current earnings, value investors can profit in cyclical industries when earnings are temporarily depressed and the company's financial position is strong enough to outlast the downturn. So far, this company has the makings of being such a situation.

But investors must not assume that a company in a cyclical industry will see its earnings go back to previous levels. Changes at the company (or its competition) could render past results rather useless in forecasting future earnings.

In Global Railway's case, it is no longer the same company it was a year ago. The company sold its instrumentation and track/signal segments in the last few months in order to pay off debt. So though the company now operates with a cash surplus, it has only its locomotive segment left.

As such, in estimating future earnings, investors would be better served focusing on the earnings derived by the locomotive segment over the last few years. The problem, however, is that the segments that the company sold were its most profitable! In fact, its locomotive segment has not made money since the company started breaking out its results separately some four years ago. As such, investors expecting this company to return to profitability as railway economics improve may be sorely mistaken!

Nevertheless, Global Railway does trade at a significant discount to its net current assets, and so some investors may be interested regardless of the company's past record with its only remaining segment. If the company is able to turn things around, shareholders would likely see a large payday.

Disclosure: No position


Anonymous said...

I think the clues for Global Railway turnaround are in Q4 results. If you read the Q4 MD&A adjusted gross margins, SG&A adjusted for one-time costs this company is quite profitable already and has strong cash flow. Including escrow funds Global has over $1.25 per share in cash and no debt. At current trading levels what is the downside?

Anonymous said...

Here is details of the large contract that GBI is low bidder on. Award of this would be the catalyst to unlock some of the value here.

Metrolink has published the tender prices for the refurbishment contract, showing CADRI as the lowest price. It is now up to CADRI management to complete all the other steps to secure the contract.

Formal Tender Responses Details

Printed: 30-Mar-2011 07:20

Tender Information

Tender Number: IT-2010-REM-100


Closing Date / Time: 29-Mar-2011 00:00

Bids Received: 3

Vendor Information

1. CAD RAILWAY INDUSTRIES LTD. $120,590,647.70