“Fiscal Cliff Winner” From the Yield Shark

Sniffing out a pork barrel beneficiary from John Mauldin and Ed D'agostino

By Travis Johnson, Stock Gumshoe, January 21, 2013

John Mauldin launched a newsletter last year called Yield Shark, a bit of a departure from his frequent “big picture” musings about the economy and trends and the “end game” of government fiscal crisis …

… so now he has folks recommending specific stocks that they think will benefit from the end game and provide growing income to investors.

Here’s how they pitch it in this recent ad:

“Behind every dark cloud is a silver lining. While Washington has done absolutely nothing to address the endgame, there’s no sense sitting around and sulking about it. We here at Mauldin Economics believe there’s a silver lining for investors to what Congress did agree to…

“And that there’s an opportunity to take advantage of their pork-barrel spending. As a result, we’ve identified a slew of investments that should ultimately translate into a triple dose of cash for investors from:

(1) A lower dividend tax rate;
(2) A rising steam of dividend income; and…
(3) Potential capital gains from higher stock prices.”

Well, it’s a holiday here so we’re not going to go into a “slew” of investments … but we thought you might be laying around the house, bored and looking for something to research, so we thought we should at least ID their first pick for you to get you started. If there’s interest in these kinds of investments we can set the Thinkolator to work on the other “fiscal cliff winners” that they tease when everyone’s back at work at Gumshoe HQ.

So what is the first ‘Fiscal Cliff Winner?” Here are the clues:

“Fiscal Cliff Winner #1:

“A 3.1% Dividend From a Tax-Favored Company

“The $165 million of free government money included in the fiscal-cliff deal designed to help the railways is going to free up capital that would have been spent on maintenance to purchasing more rolling stock of railroad cars.

“And boy, does the railroad industry need more cars. Shipments of petroleum on US railroads rose more than 46% in 2012, as shale oil producers put record amounts of crude on trains to overcome pipeline capacity constraints.

“According to the Association of American Railroads, petroleum shipments reached 540,000 carloads in 2012, up from 370,000 carloads in 2011.

“That big increase is from the booming US shale-oil boom, and the opposition to the construction of new pipelines, such as the Keystone Pipeline, has created a shortage of tankers.

“One company set to cash in is a leading manufacturer of tanker and hopper railcars. Manufacturing more than eight different types of railway cars, the company is a leading provider of tanks and freight containers to the railroad industry.”

That’s a story that we’ve heard before, so it piqued my interest a bit — some of the good news lately from Warren Buffett’s Berkshire Hathaway has been due to the increased shipment of oil by rail (Berkshire owns the Burlington Northern Santa Fe railroad), and rail has been a hot investment topic for a few years now … not always going up, of course, but very much tied to the various commodity booms and busts that we’ve seen (coal and agricultural commodities move by rail, too, as do others … including more oil now that the mid-continent discoveries have inconveniently not all matched up with the existing pipeline system very well).

So which player specifically is being pitched here? A few more clues:

“Revenues jumped to $168.2 million, a 37% increase from the $125.8 million for the third quarter of 2011;
Earnings per share rose to $0.66, a new all-time quarterly record;

“Orders continue to pour in with the order backlog growing by 7,630 railcars. The company sold 1,460 railcars last quarter, so that backlog is about 1.34 years’ of business on the books… and new orders continue to pour in.

“The company’s share price is cheap: it trades at only 10 times earnings and pays a quarterly dividend of $0.25 a share, giving it a dividend yield of roughly 3%.

“One of our country’s largest and savviest investors owns a chunk of the company and is the majority shareholder.

“The company’s share price is very near an excellent buying opportunity. We’re near ready to issue a buy on it. Given the company’s 3.1% dividend… its price-to-earnings ratio… the clout the company’s major shareholder has… and the chart pattern forming in the company’s share price…

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“This stock is one of our top picks for 2013.”

So what have we got here? This is, according to the quick cycling of the Mighty Mighty Thinkolator, American Railcar Industries (ARII).

Which is indeed controlled by one of the more closely followed “whale” investors — it looks like Carl Icahn owns more than half of the company. He has also been trying to make the company larger, bidding for competitor Greenbrier (GBX) and owning up to 10% of that company before getting snubbed recently. That bid-up and snub doesn’t mean that ARII and GBX won’t end up making sweet, sweet music together at some point, but it looks like the Greenbrier folks were well aware that they’re at a good spot in their business cycle and they’re holding out for a better bid. GBX, for what it’s worth, is now significantly cheaper than ARII on a trailing earnings basis, though both companies trade for about ten times next year’s forecasted earnings so neither appears particularly expensive.

ARII’s quarterly numbers match the tease perfectly, and the stock has been rising nicely in recent months but does have a history of growing in fits and starts, with some weak quarters bringing substantial downdrafts for the stock from time to time. I don’t know the company well, but that makes some intuitive sense for a company that manufactures capital goods and probably has uneven order flow — if they’re going to be running flat out to satisfy tanker demand for oil trains then perhaps things will be steadier for a while, but from their past history you’d have to expect that there should be buying opportunities on dips from time to time.

They do pay a dividend of a quarter per quarter, though that just started after several years of not paying a dividend at all so they don’t particularly have a dividend growth history to give investors confidence. The shares are up since this tease was written, so that’s slightly under a 3% yield now.

There are other companies in this space — including Berkshire Hathaway itself, since they own Union Tank Car, one of the major owners and lessors of tank tars, thanks to their takeover of Marmon a couple years ago. The publicly traded stocks that are focused on rail cars also include Trinity (TRN) and Freightcar America (RAIL), though there are many different kinds of rail cars and from what I can tell ARII is the closest to being a publicly traded “pure play” on tankers and hoppers, specialized cars for bulk commodities. The shipping of oil by rail is not a new thing — though more ethanol and refined products have been shipped in the past, I expect (ethanol can’t use conventional pipelines) — and there are plenty of technologies and designs in wide use by all of the manufacturing companies in the sector, so I don’t know if anyone has a particular edge. Trinity just bought a manufacturing plant to expand production (it will be converting from manufacturing wind turbines, interestingly enough), for example.

Greenbrier does seem to be the most similar company to ARII, and it does make sense that the two companies would be better and more efficient together, so there may well be some future offer engineered by Icahn or y the big investment banks who are sniffing around the sector. Who knows, maybe Greenbrier will turn around and go after ARII — Icahn’s control of ARII is the wild card, since that means they can swing on a dime if his opinion changes.

I haven’t studied the backlog or the prospects of any of these companies in any detail, but just a quick look at the financials has me more comfortable with American Railcar than with GBX — ARII has substantially higher profit margins and has a much better balance sheet, with about half as much debt, though both are of similar size if you go by enterprise value and GBX is a bit cheaper now that they’ve come down from their proposed-takeover high. Both have similar growth expectations and are very reasonable values if the growth that analysts expect comes through.

So there you go … have a Happy Martin Luther King, Jr. Day, and think on those railcars for a bit if you’re so inclined. I find the sector and the idea interesting, though I already have some exposure to it through a substantial holding in Berkshire Hathaway so I don’t yet know if I’ll want to increase that exposure. Feel free to share your thoughts about Mauldin’s railcars and profit potential with a comment below.



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January 21, 2013 7:07 am

Thanks to Obama and his great EPA department the train is more efficient than the pipeline and another estimated $5 to $10 more a barrel for the US consumer.

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Slick Rick
January 21, 2013 8:48 am
Reply to  baygreen

Warren Buffet and Obama struck a deal ……..Warren Buffet agreed to come out with …….”we all need to pay more taxes” while he is still fighting the IRS over some tax issues. Obama turned down the Keystone Pipeline , and Warren gets to ship his oil via his freight trains reaping a financial fortune while the rest of us taxpayers take it in the shorts.

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John Harris
John Harris
January 21, 2013 2:41 pm
Reply to  Slick Rick

So far as I know, Obama only postponed approval of the northern half of the pipeline at the very request of the republican governor(s) of states like Nebraska who asked for certain routes in sensitive areas to be reconsidered and rerouted. Stop blaming Obama for merely doing with the republicans asked him to do. And soon enough the northern half will get redrawn and approved.