It looks like Carl Icahn was on to something. Last year, he tried to acquire the The Greenbrier Companies (NYSE: GBX) for $22 a share, an offer that was subsequently rebuffed by management. In November, I cautioned that it was unwise to follow Icahn into this crowded stock because once he loses interest (as he often does when pursuing his prey), shares tend to wilt.
And that's precisely what happened with Greenbrier.
Yet we can add a fresh twist to the much-ballyhooed "Icahn effect." The legendary investor may be known for too many head fakes, but after he walks away, then real value may emerge. Indeed, it now looks as if Icahn was on the right track in his ardor for this stock, as just-released quarterly results show. As it turns out, Greenbrier and another transportation firm, Wabash National (NYSE: WNC). may be shaping up to be top gainers in 2013.
Replacing the fleets
Greenbrier, a leading provider of railroad cars, and Wabash, a top provider of truck trailers that ply U.S. highways, share several key traits.
First, they've both been suffering from a lean stretch as key customers have held off upgrading their equipment ever since the Great Recession hit in 2008. That long cycle of under-investment has led to aging fleets for railcars and truck trailers. Second, and more important, both of these firms now appear poised for a solid upgrade cycle. Greenbrier, for example, had a backlog of 10,700 railcars on its order books as of the end of August. That figure dipped to 9,700 as of the end of November, but in subsequent weeks, Greenbrier snagged orders for 2,800 more railcars, pushing current backlog up above 12,000 units.
The challenge now for management is to run this company with a firmer grip on costs. Greenbrier has been dogged by accusations of bloated costs, which was a key factor behind Icahn's attempts to acquire the company (and presumably cut costs soon thereafter).
Greenbrier has gotten the message. "Our four key focus areas for 2013 are: enhancing operating margins, expanding product and service offerings, increasing free cash flow, and business diversification and growth," noted company president William Furman in a Jan. 9 press release. According to company guidance, quarterly results should strengthen as the current fiscal year progresses.
Management at Wabash National is pursuing a similar business restructuring, which will likely be augmented by a cyclical demand rebound as we head toward mid-decade. I touched on this transformation in August 2012. The company went on to deliver sharply-improved quarterly results two months later. As a result, shares have posted a solid rebound.
Wabash's fast-improving gross margin profile
And firming margins are directly feeding into a growing bottom line: Wabash's earnings likely rose from 24 cents a share in 2011 to 95 cents a share in 2012. Analysts say earnings could reach $1.30 per share in 2013. A firming economy into mid-decade could help push earnings per share (EPS) even higher by 2014 and 2015. Again, this stock still trades for less than $10 a share.
In a similar vein, Greenbrier also appears to represent solid value, trading at less than eight times projected 2013 profits. And a firming economy, coupled with the company's looming streamlining, should push EPS higher into mid-decade as well.
Action to Take --> In his ill-fated pursuit of Greenbrier, Icahn may have unwittingly tipped investors off to a key theme. Transportation equipment providers, many of which have suffered from years of subpar demand, may be on the cusp of a robust cyclical upturn. And sector share prices haven't begun to reflect the better days ahead.