FreightCar America (RAIL) still temptingly cheap

I’m still doing some work trying to understand the railcar and coal industries, motivated largely by my feeling that RAIL represents a great opportunity. With 80% North American market share in the coal car manufacturing and with the substantial majority of the company’s business tied up in delivering to this market’s participants, it’s clearly an important item of research.

The industry is in a bit of a bubble, some say, that will burst within the next few months/years. Nonetheless, I think this may be a good time to by RAIL, since the bearishness on the industry going forward in the short-term has left the stock under-appreciated and poised to break out over the next few years, as coal has become a more long-term viable and growing business.

Things I like about the company:

– Great market share

– Working to diversify its revenue stream by offering cars catered to the needs of other buyers (not just coal transporters)

– Great returns on capital and respectable margins

– Growing institutional interest given Buffett’s recent railroad purchase and the cheapness of the stock

– Transparency of a good chunk of the next year to two year’s revenue given the nature of contracts with customers and order backlog records.

Things I don’t like:

– Cyclical business

– Product with long life-cycle, dependent upon spotty orders and infrequent repeat business for replacements

– My own uncertainty of the coal industry