The Norfolk Southern (NSC) train derailment in East Palestine, Ohio, that led to toxic chemical fears -- including vinyl chloride and butyl acrylate leaks -- has put the spotlight on freight-train safety.
The Department of Transportation last week recommended expediting from its 2029 deadline the phase-in of safer tank cars, known as DOT-117. DOT-117 tank car was initially developed following the 2013 Lac-Mégantic derailment disaster in Quebec, and the ensuing calls for rigorous technical requirements for railcars that transport flammable and hazardous liquids.
This doesn't mean rail giants will wait for tougher regulations to make changes.
The Greenbrier Companies (GBX) has already developed safer DOT-117-compliant tankers -- which it released in 2014. The company has led the industry in the advancement of safety measures.
Greenbrier, the manufacturer of almost 40% of all freight railcars in North America, stands to benefit from mandated upgrades. The company is an integrated producer of railcars and marine barges with a $1 billion market cap, a 3.5% dividend yield, and a 13 price-to-earnings. It is a leading provider of services and parts for the railroad industry and has a significant railcar leasing operation in North America, with a fleet of 355,000 railcars. In recent years, the company has expanded its operations in Europe, the Middle East, and Brazil while also increasing its leasing operation.
The DOT noted that it could pursue further rule-making on the transportation of high-hazard flammable chemicals by rail and on electronically controlled pneumatic brakes for railcars. This could be a long-term positive for Westinghouse Airbrake Tech (WAB) , a producer of pneumatic brakes, although it is hard to gauge how much congressional traction the proposal will have. The Trump Administration scuttled in 2017 similar proposed rules for advanced brakes.
The railcar industry is susceptible to economic swings. In 2022 it slumped after the shift in consumer spending from goods to services. Challenges may lie ahead for coal and its transport due to the plummeting price of natural gas.
Cowen estimates that with Greenbrier's high market share of the North American tank car market, there could be a around 7% earnings upside from incremental railcars produced or retrofitted in 2024.
"We see the industry being able to produce or retrofit" around 7,500 tank cars in 2024 incremental to total build expectations of 40,000 to 45,000 railcars while also meeting the 2023-2026 scheduled maintenance timeline, said Cowen. "The total incremental 2024 opportunity is just north of 2,500 tank cars. There would be additional opportunities for 2025-2028."
Data from the Association of American Railroads (AAR) estimates more than 35,000 non-compliant tank cars need replacement or retrofitting.
Industrial stocks outperformed the market in 2023 as investors rotated into the group, and the trend is likely to continue. The rail industry is far more receptive to advancing safety initiatives to limit further liability after the recent train wreck and horrific aftereffects in East Palestine and also to avoid further rule-making. Over the next few years, GBX should get a boost from increased production and retrofitting of freight railcars due to accelerated compliance for safer tankers.