The market values this company at less than 10% of what it did just 2 years ago. It has certainly taken a beating and probably for good reason - but I think the pendulum has swung too far - and there lies the opportunity.

First the good news

The company received another $10 million on top of the $60 million noted above from the Paycheck Protection Program. In fact that is how I discovered the company - I was outraged public companies were receiving Paycheck Protection Program at the expense of small business.

With more research, it looks like their claim seems justified and my outrage might have been misplaced.

The company has a backlog of orders worth $221 million compared to $206 million a year ago.

Management is in fixer upper mode - closing down high cost operations and opening lower cost replacements. Management is very focused on maintaining good liquidity.

Back orders are not being cancelled according to discussion on the earnings call.

Now the bad news

Due to Covid-19, Q1 sales were only $5 million compared to $70 million last year. (See what I mean about the Paycheck Protection Program probably being justified)

New orders received in Q1 were 300 units all of which were rebuilt railcars, compared to orders for 694 units, consisting of 194 new railcars and 500 rebuilt railcars, for the three months ended March 31, 2019. So new orders have slowed dramatically with the onset of Covid-19.

FreightCar has a long term lease liability of $52 million for things like land, buildings, facilities etc. These leases range between 2.5 and 8 years. Makes the balance sheet look ugly, but I would expect we will see this reduce as they pay their rent each year in the normal course of operations. Add the current portion and the timeline looks like:

The aggregate future lease payments for operating leases as of March 31, 2020

FreightCar has a chronic profitability problem with consolidated operating losses for Q, 2020 of $17.1 million compared to $14.5 million Q1 2019.

$RAIL burnt through $6 million in cash flow in Q1 2020 compared to generating $1 million in Q1 2019.

The industry in heavily cyclical and while the company has some patents, I do not think it has a moat. It appears fully exposed to the forces of competition.

$RAIL FreightCar America

The company is FreightCar America Inc. (NASDAQ:RAIL) and it manufactures a wide range of railroad freight cars, supplies rail-car parts and leases freight cars.

FreightCar design and manufacture a broad variety of railcar types for transportation of bulk commodities and containerized freight products primarily in North America. We rebuild and convert railcars and sell forged, cast and fabricated parts for all of the railcars we produce, as well as those manufactured by others. We also lease freight cars. Our primary customers are railroads, shippers and financial institutions.

The rail-cars, including coal cars, bulk commodity cars, covered hopper cars, inter-modal and non-inter-modal flat cars, mill gondola cars, coil steel cars and boxcars.

FreightCar is headquartered in Chicago, Illinois and has facilities in the following locations: Cherokee, Alabama; Grand Island, Nebraska; Johnstown, Pennsylvania; and Shanghai, People’s Republic of China, and construction is underway on a facility in Castaños, Mexico.

So as long as there are railways, and Warren Buffet has bet big on railways, there is going to be a need for somebody to build rail-cars. The question is will FreightCar be the company making them?

Why did I buy FreightCar?

With $60 million in the bank, a big backlog (versus a $14 million market cap), and a management dedicated to fixing the profitability issues facing $RAIL, I think the company has enough run way to get through the Covid-19 crisis, turn itself around and return to its former valuations. If it does, it will be a 10 bagger, if it only makes it half way back - it will still be a 500% gain.

This all comes down to management producing the goods. I am prepared to back them and share in the rewards if they are successful.

But be warned - these key stats look terrible. We are really betting on a major turnaround.

Source: QuickFS.net

Not Investment Advice

As always, this is not investment advice. Do your own research. Consult your professional advisors.