Greenbrier stock stalled on the tracks

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Shareholders in the Greenbrier Cos. Inc., a maker of railway cars, were having a happy holiday season, as a buyout offer from investor Carl Icahn pushed the shares to levels not seen since early spring.

Alas, Greenbrier's board said late last week that Mr. Icahn's $22 (U.S.) per share offer, made when Greenbrier's stock was trading near its 52-week low around $13, "grossly undervalued" the company.

And so, Mr. Icahn, who controls a major competitor to Greenbrier and had hoped to combine them, has abandoned his efforts. He is now selling off what was a 10 per cent stake in the company, prompting a loss of nearly 30 per cent since last Wednesday's highs. Greenbrier's shares struggled to stay above $15.50 in abbreviated trading Monday, its third straight day of declines.

Since Greenbrier's main product line is railway cars that transport coal, you might guess what we say Mr. Icahn has left in Greenbrier shareholders' stockings this Christmas.

But will that coal become a diamond some day? In April the Globe's VOX column (written by me) highlighted Greenbrier shares as "a relatively inexpensive way to bet that things will continue to improve south of the border." The company had just posted a disappointing earnings report and the shares had pulled back from $22 to the $17-to-$18 range.

(Disclosure: I'm eating my own cooking on this one. I bought a total of 300 shares in one of my retirement accounts in April and May at an average cost of $16.39 and did not sell any at last week's highs.)

The theory: The railcar stocks move based not so much on earnings, but on the order "backlog," since that stat is an important future predictor of earnings.

Greenbrier's backlog was declining at the time, but bullish analysts said that was due to slowing orders for cars that transported equipment for the hydraulic fracking industry, and Greenbrier's other railcar products showed signs of strength. A number of analysts said Greenbrier and its peers were closer to the beginning of a multi-year expansion than to its end.

Now, with the benefit of a couple of quarters more of earnings, we know that was too optimistic. After several quarters of healthy growth, Greenbrier reported flat sales and a sharp decline in profits in the quarter ended Aug. 31, its fiscal fourth.

Its guidance for fiscal 2013, issued three months in on Nov. 1, calls for railcar deliveries in the range of 11,500 to 13,000, down from 15,000 in fiscal 2012. Management said that at the upper end of the delivery guidance range, revenue, and profits "will be similar to fiscal 2012."

And that's a major disappointment. Analyst Peter Nesvold of Jefferies & Co., who had a "hold" rating and $20 target price after the April earnings, forecasted fiscal 2012 earnings per share of $2.19 and fiscal 2013 EPS of $2.65.

Greenbrier closed fiscal 2012 with EPS of $1.91 on a fully diluted basis; is 2013 earnings "will be similar" even on the high end of the range for railcar-delivery guidance, it suggests earnings 30 per cent below past expectations.

At this point, it seems, the U.S. economy is growing, but Greenbrier is not. The onus is on management, now, to prove why the shareholders are better off on Greenbrier's current path than taking Mr. Icahn's money.