What a brutal six months it’s been for Greenbrier. The stock has dropped 20.2% and now trades at $45.01, rattling many shareholders. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Greenbrier, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Greenbrier Will Underperform?
Even though the stock has become cheaper, we don’t have much confidence in Greenbrier. Here are three reasons you should be careful with GBX, plus one stock we’d rather own.
1. Demand Slips as Sales Volumes Slide
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Heavy Transportation Equipment company because there’s a ceiling to what customers will pay.
Greenbrier’s units sold came in at 2,200 in the latest quarter, and they averaged 30.6% year-on-year declines over the last two years. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Greenbrier might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Greenbrier’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 4.2%, meaning it lit $4.24 of cash on fire for every $100 in revenue.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Greenbrier’s $2.55 billion of debt exceeds the $322.8 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $342.3 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Greenbrier could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Greenbrier can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Greenbrier falls short of our quality standards. After the recent drawdown, the stock trades at 13.4× forward P/E (or $45.01 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. Let us point you toward a dominant aerospace business that has perfected its M&A strategy.
Stocks We Would Buy Instead of Greenbrier
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