Friday, October 23, 2020

Off The RAILs

Shares of railcar maker FreightCar America have almost tripled from their market-panic lows of March, but they still represent a big loss for me, as I purchased the shares in 2018 when they were much higher. This past week, I crystalized that loss, as the company's prospects have become much more difficult to evaluate, for me anyway.

There were two things that attracted me to this investment. The first was the massive discount to book value, which itself contained a huge net cash position. The second was the oligopolistic nature of the industry; there are very few railcar makers, due to consolidation over the years.

New management took a battering ram to the first. Quarter after quarter of losses and writedowns shredded the balance sheet. Things got so bad that last week the company made a deal for a loan that required it to issue new shares representing 23% of its shares outstanding. That was the last straw for me; while management may want to put a bunch of assets at risk to chase its newest plan, I don't.

As for the second attractive feature, I underestimated how difficult it would be for the company to catch-up in efficiency to its competitors, especially when its flagship products (cars for coal) were facing decline. As a result, the downturn was much harder on RAIL than it was on its competitors. It was also a turnaround situation, since it needed to learn how to build cars that either weren't in its repertoire or that it was building poorly before.

It may work out just fine in the future. The company has lowered its costs by closing expensive plants and opening in Mexico. For me, it's just not worth the risk anymore, what with the margin of safety on the balance sheet having been destroyed, and management showing reckless regard for it in this investor's opinion.

Disclosure: No position


Anonymous said...

It's a name I've followed for years. Bought a small tracking position Friday and will watch it....I understand your frustration as I rode Garrett Motion all the way down and sold out below $2 although now it appears likely to produce a decent outcome from the current price.

It seems mgmt is being excessively conservative and stockpiling all the forseeable cash they'll need, at a very high cost, which is annoying. But if they can get back to 3,000 cars per year the stock has a lot of upside


Hey Saj
Check out epsilon energy
Just completed a 8.9% buy back,9 million in cash ,substantial insider ownership and ocf + in the current environment

Saj Karsan said...

Hi Spaced,

That industry is totally out of favour and so I suspect you will do well, but I tend to avoid the commodity space due to my difficulty in getting confidence in the future cash flows.