Freightcar America (RAIL) succumbs to high material costs and low demand

Implications: Railcar builder Freightcar America reported a quarterly loss of $0.08/share due to high material costs impacting fixed price contracts and the need to restrain prices in a very slow market for coal cars. Management expressed confidence that demand for coal cars will remain strong in the future, especially if all the new coal fired utility plants that have been in various stages of planning and construction for the past several years come online in the near future. The EIA has questioned the need for all of the new coal fired power at this time, and with the recent declines in the price of natural gas, it is possible that some of the plants may never be built.

Analysis:

Real demand for new coal cars is currently very low, with the possible exception of the need by CSX and NS to replace their aging steel car fleets to handle to surging volumes of export coal. The latter is up almost 80% over the last few years, after shrinking by a like magnitude over the previous 15 years. Freightcar America positioned itself very well to meet these needs and is currently delivering hybrid stainless steel/aluminum cars to both carriers, enjoying almost 100% of this market.

Coal production and railcar loads for domestic use have been falling for the past two years, after a record number of new cars were built in 2006 in anticipation of continued growth in coal traffic. A surplus of coal cars has existed for the past two years and monthly lease rates for these railcars have been as low as 50% of the amount needed to justify new equipment. While lease rates have risen during the past year, they are still very low and regular leasing companies are not ordering.

However, one builder is offering new coal cars are very low lease rates to new and existing lessees and is forcing Freightcar America to follow its lead. Unlike their competitor however, Freightcar cannot book a manufacturing profit when its builds a car for its leased fleet and its reported average revenue per car has been falling as a result. Management deftly avoided going into this area during their conference call.