Is RAIL Chugging Toward a Takeover?

 | Jul 13, 2016 | 1:07 PM EDT
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rsti

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skul

Two "double-net" stocks that I've written about in recent months have agreed to takeovers, while a third has become the subject of a bidding war. Now, I won't delude myself into thinking that every value stock that I identify will become an acquisition target, but I definitely believe that there are more such potential names out there -- like FreightCar America (RAIL) .

As a reminder, what I call "double-net" stocks are value plays that trade between 1x and 2x of net current asset value. Two such names that I've recently profiled -- Ingram Micro (IM) , Rofin-Sinar Technologies (RSTI) -- have since cut takeover deals. A third, Skullcandy (SKUL) , also agreed to a buyout but has subsequently gotten an unsolicited rival offer.

FreightCar America, which recently hit my radar screen, could be next. The railcar manufacturer has had a rough go of it recently. The stock down some 8.5% so far today, as well as more than 20% year to date and some 40% since RAIL's November intraday peak.

The railroad industry is facing some tough times from the stronger U.S. dollar and low energy prices (which hurt coal shipments). That's carrying over to FreightCar America's business.

Part of the stock's recent drop stems from an earnings shortfall last quarter, when RAIL made just 28 cents a share -- well below analysts' 43-cent consensus estimate. As a result, the stock has fallen to the point where it currently trades at just 1.2x or so of net current asset value.

Still, FreightCar America remains profitable and trades at only 1.6x or so of its enterprise value to EBITDA. And while earnings have been falling, RAIL still fetches some 20x next year's consensus earnings estimates.

Now, given FreightCar America's declining earnings picture and the troubled industry that the firm operates in, you could easily conclude that this stock is a falling knife. But the company's solid balance sheet could serve a backstop to that.

After all, FreightCar America ended last quarter with no debt and $91 million in cash. That's about $7.40 a share of cash for a stock that currently trades at about $14. RAIL also sells for just 0.8x tangible book value per share and pays a 9-cent-per-share quarterly dividend, which translates into about a 2.4% current yield.

We'll know more about the stock early next month, when analysts expect FreightCar America to report second-quarter earnings. Consensus estimates call for the firm to show 43 cents per share in profits.

In the meantime, buckle up if you own or want to buy this railroad-related stock. You could be in for a very bumpy ride!

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