FreightCar America Jumps the Value Tracks

 | Mar 06, 2017 | 11:00 AM EST
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The divergence between the broad markets, which seemingly hit a new high nearly every day, and the underbelly of deeper value continues to grow. This makes for a frustrating environment for deep-value dumpster divers.

The kicker is that, once we get a pullback, those deeper-value names are likely to take it on the chin, to a greater extent than they already have. Down in an up market followed by getting crushed in a pullback is the nightmare scenario, but that's the price you sometimes pay when trying to identify deep value.

One of the latest victims is 2017 Double Net Value Portfolio member FreightCar America (RAIL) , which is down about 12% year to date and left the market extremely underwhelmed with last week's fourth-quarter earnings release. Revenue of $135.5 million was down 33% year over year, but handily beat the consensus estimate of $114.4 million. However, earnings per share of one cent badly missed the 14-cent consensus. The stock was down as much 13.5% intraday following the release last Monday, but recovered somewhat to finish the day down 6%.

RAIL already was expected to have a challenging couple years when I took an initial position in late September, but the question then and now was whether the punishment the stock had taken fit the crime. That's often the question with deeper-value names (also known as value traps when they don't work out). In RAIL's case, shares are down by about two-thirds since September 2014. The company's order backlog has been falling, and the state of the railroad industry, including cost cuts, has not helped matters.

So, the case for RAIL mainly was based on a very strong balance sheet, one that could weather quite a storm and might entice an acquirer to step forward. The balance sheet has weathered the storm well so far. RAIL ended the year with cash of $92.8 million, or $7.56 per share, and no debt. That puts the company's enterprise value (market cap plus debt minus cash) at less than $70 million. RAIL also trades at just 0.69x tangible book value per share and is very close to net/net territory, currently trading at 1.03x net current asset value. RAIL has maintained its nine-cent quarterly dividend and yields 2.74%.

There's not a whole lot expected of this company in 2017 on the earnings front; indeed, the consensus estimate is for a loss of 36 cents. It's a similar story for 2018 at this point. One question is whether a resurgence in coal will happen and, if so, whether/when it might impact the company, which manufactures coal cars. Management had low expectations on this front in its rather downbeat earnings call.

At this point, success from here is a matter of some better-than-expected news and maintaining the integrity of the balance sheet until the business environment improves for RAIL.

No one ever said deep value is pretty.

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