Cowen Talks American Railcar Industries Move And The Rail Run

Railcar stocks rallied strongly on Monday amid a deal in the space.

Offloading Railcar Leasing Firm

Carl Icahn's Icahn Enterprises LP IEP announced Monday a deal to sell its wholly owned subsidiary American Railcar Leasing to a subsidiary of Sumitomo Mitsui Banking Corp. for cash based on an enterprise value of $2.778 billion and a fleet of about 29,000 railcars. The deal is expected to close in the second quarter of 2017. After three years, the Japanese firm has an option to buy an additional 4,800 rail cars for about $586 million.

A Case Of Wrong Identity

American Railcar Industries, Inc. ARII, in which Icahn has a controlling 61 percent stake, also rose strongly, with the markets initially construing the deal as related to the company.

Cowen analyst Matt Elkott told Benzinga the one concern arising out of the deal would be the onus of finding a sales & marketing or fleet management team falling on American Railcar Industries. Earlier, this was contracted to American Railcar Leasing for about $7 million to $8 million. Nevertheless, the analyst feels the transition, if need be, would go smoothly.

Cowen Sees Near-Term Pullback On Earnings

In a note released last Friday following the Cowen & Company rail equipment conference call with four rail equipment experts, Elkott said an uptick has occurred for one builder but has not translated into increased orders. The analyst added that the increased inquiries were for different equipment types, including plastic, pellet, intermodal and auto racks. The panelists at the conference sounded slightly optimistic about the industry outlook than they did before, the analyst added.

Cowen also commented that the big run up in stocks suggests more than a slight improvement in outlook. The firm remains concerned that earnings may act as reality checks, causing near term pull back in stocks.

The firm said it remains largely positive on Trinity Industries Inc TRN and Greenbrier Companies Inc GBX, which are rated Outperform.

Outlook Uncertainty, Valuation — Concerns

In a note released on December 2, Kansas City Capital Associates downgraded American Railcar Industries to Perform from Outperform. The revised opinion came about following the release of the company's quarterly results, which exceeded the firm's estimates. With the company's shares closing in on its $48 price target, the firm removed the price target and lowered its rating, primarily on outlook uncertainty and valuation.

Though the results weren't causing worries to the firm, it said it is concerned about the weakening outlook in terms of ASP, margins, lease rates and diminishing backlog. The current valuation, according to the firm, was borne largely by the dividend yield, repurchases below $40 per share and speculation of improved general economic outlook. However, the firm cautioned that any acceleration of softening financial trends may be difficult to counter.

The firm believes regulatory catalysts could materialize too far out into the future to support the ongoing share price traction.

At Monday's Close

• American Railcar Industries rallied 5.41 percent to $47.38.
• FreightCar America, Inc. RAIL jumped 5.35 percent to $15.76.
• Greenbrier ended up 2.75 percent at $43.
• Trinity Industries edged up 0.60 percent to $28.34.