Icahn's American Railcar Leads Tank-Car Rally After Oil Rout

  • Investors seen tiptoeing back toward `cyclical' industry
  • Crude's rebound helps revive Trinity, Greenbrier as well

Carl Icahn’s American Railcar Industries Inc. is leading a rebound among railroad tank-car producers as traders embrace the industry again after a rout in the stocks.

“The cyclical nature of the railcar business has caused investors to overreact,” said Eric Marshall, president of Hodges Capital Management, which owns about $122 million of shares in Trinity Industries Inc. “That’s usually when you make your money in stocks is buying cyclical companies at the bottom of the cycle.”

American Railcar, Trinity and Greenbrier Cos. each tumbled at least 50 percent through September from year-earlier peaks on concern that a surge in North American tank-car output was being undercut by low oil prices and the ability of refiners along the U.S. East and West Coasts to import overseas crude. This month, the stocks began surging, paced by American Railcar.

Tank-car producers saw backlogs swell in 2014 as orders poured in for equipment to haul oil pumped from remote North Dakota fields that lacked pipeline access. The frenzy of drilling and car orders triggered when oil exceeded $100 a barrel has abated after crude dropped to a low of $38.24 in August.

A recent oil-price recovery “is a big portion of the rally” for tank-car stocks, said Matthew Brooklier, an analyst with Longbow Research. West Texas Intermediate crude rose to $49.43 a barrel Thursday, the highest since July.

New U.S. safety rules adopted in May may spur companies to scrap older cars instead of spending as much as $40,000 to bring each one up to the revised standard, Marshall said in an interview. That would help stimulate demand in a market that has already peaked, he said.

Sales of other car types for hauling vehicles, lumber and grain may cushion the blow, Marshall said, after manufacturers built fewer of those models while they focused on filling tank-car orders.

Industry Skepticism

Art Hatfield, an analyst at Raymond James Financial Inc., wasn’t sure that a change in mix would help the industry.

“Can they build other car types? Yes,” Hatfield said. “But I don’t know they can do enough to offset the decline in tank-car building.”

He’s not alone in his skepticism. His underperform rating on American Railcar is one of two equivalent to a sell recommendation, along with seven holds and only two buys, according to data compiled by Bloomberg. Analysts are slightly more optimistic about Trinity and Greenbrier, with seven buys, four holds and one sell rating -- Hatfield’s -- for each company.

American Railcar climbed 35 percent this month through Thursday. Trinity jumped 19 percent, and Greenbrier rose 17 percent, topping a 4.9 percent advance for the Standard & Poor’s 500 Index. American Railcar pared its gains Friday, falling 2.4 percent to $47.65 at 12:40 p.m. in New York.

The decline in prices from 2014 is attracting investors even as earnings are projected to fall next year, Marshall said.

“We’re on the back of the tank-car cycle, no question about it,” he said. “How bad will the trough be in tank car? We really won’t see what that looks like until 2016.”

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