Coal car builder Freightcar America blames poor economy while coal traffic is up 4%

Implications: CEO’s never like to go into lengthy explanations on the dynamics of their industry in explaining a dismal financial performance, but with year to date coal volumes up 4.6%, according to the most recent AAR report, blaming the economy for the problems besetting the company seems more like dodging the issue than helping shareholders understand the situation. The new president of FreightCar America cannot be blamed for how the company found itself in these waters, but a better explanation of the problems might have given shareholders more confidence in his ability to navigate the company in the future.

Analysis:  Two years ago, a combination of real and artificial demand, coupled with over optimistic speculation by freight car lessors resulted in windfall profits and volumes for this coal car builder. Back then, everyone knew the bubble would eventually burst and the high level of orders would disappear as surplus cars began to arrive in the market. It was hoped that the railroads would not be able to return to the train speeds they had achieved just a few years earlier, but such was not the case and many of the cars that had been built to compensate for the lengthy car cycles became unnecessary as train speeds improved and car cycles shortened. Which brings us to the current situation; there are still surplus cars even though car loadings have increased 4.6% over last year’s levels.   FreightCar has a good relationship with the Norfolk Southern Railroad (NS), having purchased the latter company’s repair shops in Roanoke, VA to expand their production capacity in 2005 in order to meet the surging demand for coal equipment. NS has recently given FreightCar more orders to replace its aging fleet of steel cars and this will significantly help the company through the tough times ahead.   Competition in the railcar market is heating up, with new entrants (National Steel with its first US plant in Alabama), re-energized contestants (Trinity with its new RDL car and its aggressive leasing), and too few orders to keep everyone satisfied. Unless all the new coal fired plants that have been advertised for years finally start to come online in 2009, it will be 2010 or later before the current surplus situation ends.