The deep plunge in oil prices has been the key market theme over the past couple of months. The almost $50 a barrel share decline in oil prices has created many winners and losers in the markets. Transports like Airlines have soared while the collapse in crude has decimated much of the exploration and production and energy services companies.

The fall in energy prices has also spread to other areas of the market such as engineering and construction firms and even aerospace manufacturers like Boeing (NYSE: BA). Some stocks have quite frankly been unfairly punished as investors have bailed on anything connected with the oil and gas industry. One sector of the market that has been hit by a shortsighted overreaction is railcar manufacturers with all names in this space being taken out to the woodshed and beaten like a rented mule. This is creating some great buying opportunities in the area, none more so than Greenbrier Companies (NYSE: GBX) which manufacturers, leases and repairs a variety of different types of railcars, a new addition to the Turnaround Stock Report portfolio.

The stock of Greenbrier fell more than $30 a share or some 40% during the fall on irrational fears that the fall in oil prices will significantly impact its business fundamentals. It’s since retraced some of that. This is a huge buying opportunity as if anything Greenbrier’s business drivers have actually improved over the past ninety days.

The market is obsessed that the recent fall in oil prices will completely curtail demand for new oil tank cars. Although exploration and production companies are cutting capital expenditures, there is little doubt than domestic oil production will continue to grow in 2015 albeit at a slower rate than in previous years.

The amount of oil transported via rail will also continue to grow. Credit is likely to dry up for huge capital projects like pipelines costing hundreds of millions or even billions of dollars to build. These projects also face increasing environmental opposition which has prevented the approval of the Keystone pipeline for six years. Just recently the President again signaled that he would not sign legislation approving the pipeline.

Railcars, in contrast, are relatively minor purchases at less than $200,000 apiece. More importantly, they are bought by railroads that are flush in profits or leased out by manufacturers or other leasing entities. No credit concerns will apply in this space.

The company put a transformation strategy in place a few years ago which remains firmly in place and is improving margins and earnings volatility. This plan consists of Greenbrier improving diversification by growing its repair and leasing businesses, greater manufacturing efficiencies, improving free cash flow and decreasing earnings volatility. Let’s take a look at the overreaction in the market and the core business drivers for Greenbrier.

Overreaction:

I read dozens of earnings call transcripts in any given month, it is hard to find a more positive quarterly call than the one that commenced after the last strong quarter reported by Greenbrier. I could fill up the next three pages with all the positive commentary around the company’s results and business prospects.

I will only pick out a couple of snippets its CEO offered investors on last quarter’s conference call. These include “Markets and businesses that have been under performing for the past 2 years are all recovering such as repair, double-stack, forest products and marine. All of this provides Greenbrier strong tailwinds in addition to strong markets, unlike anything we have seen in recent years and perhaps the strongest in our history” and “Greenbrier’s prospects are strong for continuing to improve margins and operating efficiencies while bolstering strong cash flow”.

Consensus earnings estimates for both FY2014 and FY2015 have gone up considerably even as Greenbrier’s stock price has cratered. Three months the consensus estimates called for Greenbrier to earn $4.12 a share in FY2014 and $4.69 a share in FY2015. The current consensus calls for the company to make $4.49 a share in profits this fiscal year and a whopping $5.39 a share in FY2015. Rarely do you see such a divergence in stock price and earnings estimates. To put the earnings power of Greenbrier in perspective, the company earned just $3.07 a share in FY2013.

Backlog Growth:

One of the most important things that investors should know about Greenbrier and the rail and tank car manufacturing sector in general is the following:

• All manufacturing capacity throughout the space is already committed through 2016.
• All companies in the sector will be working off existing orders for the next two years even if they don’t receive any additional orders.

Specifically to Greenbrier, backlog continues to grow. At the end of the last completed quarter, Greenbrier had an impressive $3.4 billion in order backlog – the company’s market capitalization is just a little over $1.2 billion to put that in perspective. In addition, the company has added over $1 billion in new orders since the last quarter closed.

The company is more than just an oil tankcar manufacturer. The company manufactures cars to carry autos, fertilizer, agricultural commodities, chemicals and even frac sand. At the end of the last quarter, less than 40% of the company’s order backlog was in oil tankcars – a business the company did not even enter until 2008. In the over $1 billion in orders since the last quarter, only 30% is for oil tankcars as the company is being buoyed by an improving economy which is resulting in additional orders for cars to carry autos, chemicals and agricultural commodities.

Greenbrier continues to take market share from the biggest firm in the industry leader,Trinity Industries (NYSE: TRN). Greenbrier has one third of the backlog within the industry currently, a huge improvement since the last peak in the railcar space. In addition, Trinity recently lost an over $500 million judgment due to poorly designed highway guardrails which has caused several deaths across the nation. The company is appealing but this litigation is likely to tie up some of the company’s focus and attention for years.

Other Positive Catalysts:

New safety regulations to improve the survivability of tankcars in crashes is going to buoy the demand for Greenbrier’s new much safer oil tankcar design as well as demand for Greenbrier’s repair and retrofit business. Some 170,000 oil tank cars will need to be retrofitted or replaced over the next several years due to new regulations. Given the ideological bent of the current administration these regulations could creep into other transported materials including chemicals, pesticides and herbicides, all of which will be good for this part of Greenbrier’s business.

In addition, steel prices have plunged over the past year. Iron ore fetched some $135/ton a year ago but is currently going for $70/ton; this should boost margins as steel prices are a major operating cost for this manufacturer.

Finally, the company is ramping up its leasing business. This is resulting in some loss of short term cash flow as Greenbrier holds on to a certain portion of its new railcars. However, this temporary hit to cash flow will be more than compensated for my greater earnings visibility as lease payments act as predictable annuities to the company.

Summary:

The huge decline in Greenbrier’s stock over the past three months is a major buying opportunity. The company has already exceeded the 13.5% operating margin goal it set for itself two years ago. In addition, Greenbrier has over a half a billion dollars in credit availability and a very solid balance sheet.

More importantly, earnings estimates and order backlog have continued to go up even as the shares have staged a significant decline. The company continues to gain market share, will benefit greatly by new safety rules as well as improving economic fundamentals. The shares traded near $80 before this latest hiccup. That should serve as reasonable bogey once investors realize that the plunge in oil prices has little to no impact to Greenbrier’s long term business fundamentals. This would also price the shares at just over 14 times forward earnings, a discount to the overall market multiple of 16 times forward earnings. The stock currently goes for $53 a share. Our price target represents an over 51% upside from the current price level. The stock also pays a 1.4% dividend yield.

Greenbrier is one of the recent additions to my Turnaround Stock Report service featuring stocks on the rebound. Since adding Greenbrier in mid-December my subscribers have been treated to a nice 17% return in just the past three weeks. And Greenbrier is just one of many stocks on the rise using my “Domino Strategy” in the Turnaround Stock Report. It’s still got another 51% upside to it as mentioned above. I’ve recently produced exclusive research on three more “Domino Strategy” stocks in a new report called, ”3 Empire Profit Plays for Triple Digits Gains in 2015“. To find out how the “Domino Strategy” can deliver wealth-building gains for you and how to get your own copy of my new report, just click here for a short briefing that explains everything.