New car production losses at Greenbrier (GBX) are eating into overall profits

Implications: During the last downturn in the railcar building industry, Greenbrier gained market share while cutting back production since the cars it produced were more popular that the car types manufactured by the other builders. This time around, just the opposite is true; there is almost no demand for the intermodal well cars, lumber flats, and boxcars that carried Greenbrier through the last recession, but there are still buyers for the coal, tank, and grain cars manufactured by the other railcar builders. In response to market conditions, Greenbrier closed its Canadian plant last year and began to solicit orders in other car types such as covered hoppers and tank cars. Manufacturing margins for these car types will be slim for a while as Greenbrier buys its way into these new markets. In the mean time, its plants are not operating at the levels that are necessary to earn a profit in this marketplace.

Analysis:  The multiyear contract with BNSF was recently renegotiated and orders for intermodal well cars were decreased in exchange for more orders for covered hopper and auto-carrying cars, according to reports issued by the company. Unfortunately, the long running intermodal line in Portland Oregon probably has higher profit margins than the new lines in Mexico that make covered hopper cars and the auto-carriers ordered by BNSF and overall production margins will probably slip in the future.   The company delivered almost 13,000 cars in North America in 2005, but it will be lucky to top 6,000 cars in 2008. Although Greenbrier closed one of the three plants that it was operating in 2005, it began a joint venture with another plant in Mexico and began sharing orders with that company in 2007, negating the capacity reduction that would have kept its remaining plants operating near capacity. With only 6000 cars to spread between three plants, profits from manufacturing will be severely depressed if not negative.   The market for Greenbrier’s old mainstays, intermodal and lumber flats will probably not return to healthy levels for at least two more years, and the markets that it is entering, tank and grain cars, already have at least three well established builders making it tough to grow market share and increase profit margins. Greenbrier has made significant moves to diversify its operations and has beefed up its roster of repair and refurbishment operations in recent years. These plants will hopefully carry the company through a tough time for its new car operations in the next few years.